Won to Strengthen 16% on Exports, Intervention, Kia, Kepco Say

By Kim Kyoungwha

Feb. 3 (Bloomberg) -- South Korea’s won will be 16 percent stronger on average this year as the currency’s biggest loss in a decade revives exports and prompts intervention, according to Kia Motors Corp. and Korea Electric Power Corp.

Kia, the nation’s second-largest automaker, Kepco, the biggest power producer, and Korean Air Lines Co., the leading airline, are basing their financial projections on an average exchange rate of 1,200 per dollar, a gain of 16 percent from yesterday’s close of 1,390. By contrast, Deutsche Bank AG predicts a 7 percent gain by the end of the year and UBS AG predicts a decline of 2.5 percent.

The won tumbled 26 percent in 2008, the most since the International Monetary Fund bailed the nation out in 1997 and the worst performance among Asia’s 10 most-active currencies. South Korea’s currency soared 41 percent in 1998, aided in part by a turnaround in overseas sales after the value of the won almost halved the previous year.

“What helped Korea stage a V-shaped recovery from the IMF crisis was the foreign exchange,” said David Kim, head of Kia’s treasury department in Seoul. “A stroke of good luck in the midst of misfortune is the won’s weakness, which puts exporters at a price advantage. How to increase volume is now key.”

Cho Hyun Jin, deputy head of the budget team at Korea Electric Power, known as Kepco, forecasts the government will intervene to ensure the currency strengthens. Higher fuel-import costs last year contributed to the biggest quarterly loss in the company’s 26-year history.

“We don’t see the government letting the won have a rough ride again, even though analysts are quite pessimistic on the outlook,” Cho said.

Modest Gains

President Lee Myung Bak last month appointed Yoon Jeung Hyun as finance minister, replacing Kang Man Soo who had been criticized for pursuing a weaker currency to help exporters weather a global economic slump.

Kang’s policy benefited Kia, boosting the local-currency value of the carmaker’s overseas sales and helping it almost double net income to 74.8 billion won ($534 million) in the fourth quarter.

Deutsche Bank, the biggest currency trader, predicts the won will rise to 1,300 by the end of the year, while UBS, the second-largest, predicts a drop to 1,425. The median estimate of 22 strategists surveyed by Bloomberg News is for 1,260.

Oh Suk Tae, a Seoul-based economist with Citigroup Inc., says the sharp pickup in exports that helped the won recover from the Asian financial crisis may not materialize this time.

‘Unchartered Waters’

“We only feel that the bottom may be nearing since it fell too much,” Oh said. “The thing is we’re in unchartered waters, unprecedented conditions that set the current situation apart from 10 years ago when there was external demand.”

The U.S., Europe and Japan are all in recession and South Korea yesterday reported a record 32 percent drop in overseas sales for January. The International Monetary Fund last week cut its 2009 global economic growth projection to 0.5 percent, from a November estimate of 2.2 percent.

Korean Air has based its 2009 business plan on an average exchange rate of 1,200 won per dollar, according to Oh Moon Kwon, senior manager of investor relations. SK Energy Co., the largest oil refiner, said its projections have been worked out using an exchange rate of 1,300.

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