South Korea’s Won Slides to 11-Year Low on Overseas Debt Woes

By Kim Kyoungwha

Feb. 27 (Bloomberg) -- South Korea’s won tumbled to the lowest level in 11 years on concern sliding exports will curb the supply of dollars and hinder the ability of local banks and companies to repay overseas debt.

The currency has plunged more than 18 percent this year, making it the worst performer among the 10 most-traded Asian currencies. The government will exempt overseas investors from taxes on interest earned on their holdings of domestic bonds to spur foreign investment and boost inflows of dollars, the Finance Ministry said yesterday. The nation posted its first current-account deficit in four months in January.

“They are trying to cover all bases, which is the prudent thing to do, but that does not alleviate market concerns that there may be foreign-currency liquidity issues over the next few months,” said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. “Given the impact that this had on the won in 2008, you’d be foolish as an investor to ignore it.”

The won fell 1.1 percent to 1,534 against the dollar as of 3 p.m. local time, according to Seoul Money Brokerage Services Ltd. It dropped as low as 1,544, the weakest since March 1998. The currency, which plunged 26 percent last year, slumped 9.9 percent this month, Asia’s steepest slide.

The proposed tax changes, which may help lure more funds to the local debt market, will be put to lawmakers for approval in April, the ministry said. Foreign investors hold about 3 percent of the nation’s debt. The Bank of Korea said in a statement today that the current account turned to a deficit of $1.36 billion last month, from December’s $860 million surplus.

Outflows Unlikely

Capital outflows from South Korea are unlikely this year, Vice Finance Minister Hur Kyung Wook said at a briefing yesterday. The won will see continued volatility for now, the Financial Services Commission said.

Japan Credit Rating Agency Ltd. cut its outlook for Korea to negative from stable today, saying a deteriorating economic outlook will worsen funding problems for Korean banks. The company affirmed its ratings on the foreign and local currency debts on A+ and AA-, respectively.

South Korea’s exports tumbled by a record 32.8 percent in January as sales to China and Europe dropped. The economy will contract “substantially” this year as a result of the global recession, an International Monetary Fund official said Feb. 2.

The country is headed for its first recession since the 1997-1998 Asian financial crisis, prompting Korean companies to pare production and cut workers. The Bank of Korea reduced its benchmark interest rate to a record low of 2 percent this month and Governor Lee Seong Tae said there’s room for another cut.

Scarce Funding

A gauge of availability of dollar funding by Korean lenders has remained below zero since Jan. 15 as concerns banks will face a shortage of funds deepened after Woori Bank decided not to redeem $400 million of bonds early and sought $1.4 billion in state funding. The one-year cross currency swap rate slid to an all time low of minus 2 percent last week.

South Korea is planning a $30 billion currency swap deal with the European Union, Edaily reported, citing a finance ministry official it didn’t identify. Korea has swap agreements with the Federal Reserve, China and Japan.

The yield on the benchmark five-year note fell one basis point, or 0.01 percentage point, to 4.57 percent and the three- year bond yield declined six basis points to 3.82 percent, according to Korea Financial Investment Association.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net;