Best Korean Won Forecaster Sees 1.7% Drop This Quarter

South Korea’s won will weaken 1.7 percent by year-end, following its best quarter in two years, as gains arising from global monetary easing fade and slower growth crimps exports, the most accurate forecasters say.

The won will decline to 1,130 per dollar by Dec. 31, from 1,111.05 as of 1:53 p.m. today in Seoul, according to Oversea- Chinese Banking Corp. and Westpac Banking Corp. (WBC), which had the closest estimates for the past six quarters as measured by Bloomberg Rankings. That’s more bearish than the median forecast of 1,120 in a Bloomberg survey.

The currency advanced 3.1 percent last quarter, the most since the same period in 2010, as bond-buying plans announced by central banks in Europe, the U.S. and Japan fueled investor appetite for riskier assets. The Bank of Korea is forecast to follow its Australian counterpart in cutting interest rates this week after the World Bank said 2012 growth in developing East Asian economies will be the slowest in 11 years.

“There’s potential for weakness on the external front,” Emmanuel Ng, a Singapore-based strategist at OCBC, the top forecaster, said in an Oct. 4 interview. “Quantitative easing did channel flows into emerging markets, but ultimately what’s going to matter is where the global economy is.”

The won touched an 11-month high of 1,109.57 yesterday and has rallied 2.1 percent since European Central Bank President Mario Draghi unveiled an unlimited-bond buying plan on Sept. 6. A week later, the Federal Reserve announced a third round of asset purchases, known as quantitative easing. The Bank of Japan (8301) also stepped up its note-buying program last month.

End of Impetus

“We see a major run up in risk assets on the basis of the quantitative easing announcement, but there is the combination of weak real economic activity and the end of that impetus ” Huw McKay, a Sydney-based senior international economist at Westpac, said in an Oct. 4 telephone interview. “Currency gains tend to come before the actual announcement and a little bit afterwards, but mature quite quickly.”

The World Bank said yesterday that policy makers in Asia’s emerging economies have room to provide more fiscal stimulus as Europe’s sovereign-debt crisis and China’s slowdown drag growth in the region. Expansion in developing East Asia, which excludes Japan and India, will probably ease to 7.2 percent from 8.3 percent in 2011, the Washington-based lender said in a report. It had forecast growth of 7.6 percent in May.

Growth in the region will accelerate to 7.6 percent next year, with China expanding 8.1 percent, as domestic demand is boosted by accommodative policies, according to the World Bank. South Korea depends on exports for about half of its gross domestic product. The government estimated that China accounted for some 30 percent of overseas sales from Sept. 1 through Sept. 20, making it South Korea’s biggest export destination.

2013 Outlook

Currency forecasters are more upbeat about the won for next year, with OCBC and Westpac both expecting a 1.5 percent rebound to 1,113 per dollar by March 31 from the end of 2012. Third- ranked HSBC Holdings Plc predicts an appreciation to 1,110 in the first three months of 2013 from 1,120 at year-end.

“Going into next year, the China story will be a bit more positive,” Paul Mackel, HSBC’s head of Asia currency research in Hong Kong, said in an Oct. 4 telephone interview. “That will probably lead to some support for other economies which are quite closely impacted by China, Korea being one of them.”

Forecasters were ranked according to the accuracy of their estimates in each of six quarters beginning with the three months ended June 30, 2011. To test long-term accuracy, Bloomberg added one annual forecast made on September 30, 2011 for September 30, 2012. The average margin for error was 3.66 percent for OCBC’s won forecasts, 3.91 percent for Westpac Banking, and 4.14 percent for HSBC.

Borrowing Costs

Manufacturing from Europe to China slumped in September as Europe’s debt crisis clouded global growth prospects. A Chinese factory index contracted for a second month, while euro-area services and manufacturing output shrank for an eighth month, figures showed last week.

The Bank of Korea will probably lower the benchmark rate by 25 basis points to 2.75 percent at its Oct. 11 policy meeting to support growth, according to 14 out of 17 economists surveyed by Bloomberg. “Downside risks” to the economy are rising and the central bank will aim to restore growth, the monetary authority said in a report to the National Assembly Oct. 2, a day after government data showed South Korea’s exports fell for a third month in September.

Rating Upgrade

South Korea’s sovereign credit rating was raised to the fifth-highest investment grade of A+ by Standard & Poor’s on Sept. 14, following upgrades by Moody’s Investors Service and Fitch Ratings in the previous three weeks. The move reflects reduced geopolitical risk on the Korean peninsula following a “smooth” leadership change in North Korea, which reduces the likelihood of military confrontations, S&P said in a statement.

Foreign funds increased holdings of South Korea’s local- currency debt by 5.3 trillion ($4.8 billion) won this year to 88.3 trillion won at the end of last month, data by the financial regulator showed.

“The upgrade reflects how Korea is increasingly a sound investment destination,” said Mackel of HSBC. “There is a solid story for investment flows, which should in turn benefit the Korean won.”

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net; Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net.

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

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