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Top-Performing Won Threatens to Hurt Korea Export Rebound

Top-Performing Won Threatens to Crimp South Korea Export Rebound
The won has gained about 10 percent against the yen this year. Photographer: SeongJoon Cho/Bloomberg

South Korea’s won, the best performer among Asia’s most-traded currencies since June, is threatening to curtail exports just as the economy shows signs of a rebound in growth.

The won may appreciate 8.6 percent to 1,000 per dollar by the end of 2013, according to Bank of America Merrill Lynch and BNP Paribas SA forecasts. Kia Motors Corp., the nation’s second-largest carmaker, said Oct. 26 that currency gains may hurt profitability. The won touched a 14-month high after Barack Obama secured re-election as U.S. president today.

The exchange rate, Europe’s debt crisis and a slowdown in China may prevent the economy from meeting the government’s 2013 growth estimate of 4 percent, according to the National Assembly Budget Office. While the central bank is forecast to keep rates unchanged on Nov. 9, policy makers may come under increasing pressure to cut rates in coming months should inflows of capital drive the currency higher.

“The interest-rate gap between developed countries and South Korea is spurring bond market inflows and triggering won appreciation,” said Stephen Lee, a Seoul-based economist for Samsung Securities Co., who sees the benchmark rate cut to 2.25 percent from 2.75 percent within the first half of next year. “The Bank of Korea will have to lower rates to lessen this pressure.”

The won appreciated 0.5 percent to 1,085.85 per dollar as of 1:53 p.m. in Seoul, after earlier touching 1,085.55. Asian stocks advanced, with the MSCI Asia Pacific Index up as much as 0.6 percent.

2013 Growth

The National Assembly Budget Office sees the won at 1,096 won per dollar or stronger for next year, which compares with the 1,130 assumed in President Lee Myung Bak’s budget proposal. Asia’s fourth-largest economy may expand 3.5 percent in 2013, according to the report.

The won is weighing on firms such as auto-parts supplier TLtek Co. outside Seoul, which relies on exports for about 95 percent of revenue, said Chief Executive Officer Ahn Yong Joon.

“We’re entirely helpless as the won has gained enough to threaten our profit margin significantly,” he said. “With the global economic crisis dragging on private consumption for big items such as cars, we can’t raise export prices.”

South Korea’s overseas sales rose for the first time in four months in October, a bright spot after the economy expanded 1.6 percent from a year earlier in the third quarter, the slowest pace since 2009. The BOK will report revised growth for the period on Dec. 6, with Finance Minister Bahk Jae Wan saying on Oct. 9 that the economy reached a “bottom.”

Global Indicators

Economic indicators around the world today will include German industrial production -- forecast to have declined in September from August -- and mortgage applications in the U.S. In Australia, a private gauge indicated that construction shrank at a slower pace in October.

The Bank of Korea and the Financial Supervisory Service on Nov. 5 began reviewing banks’ currency forward positions, according to a central bank official. Hana Bank and Societe Generale SA will be investigated, along with Australia & New Zealand Banking Group Ltd., the official said.

“Policy makers seem to be tinkering with additional capital-flow control measures such as tightened currency forwards limits, but they will move very cautiously,” said Lee Sang Jae, a senior economist at Hyundai Securities Co. in Seoul. “The central bank may feel tempted to cut interest rates further if the won rises through 1,050 per dollar, hurting growth momentum of exports.”

Bond Holdings

Overseas investors increased holdings of South Korea’s local-currency bonds by 5.7 trillion won ($5.2 billion) this year to 88.7 trillion won at the end of last month, according to data by the financial regulator. The amount is almost double that held by foreigners in 2009.

A 1 percent appreciation in the won would lower the earnings of Hyundai Motor Co., the country’s largest automaker, by an estimated 1.2 percent in 2013 and that of its affiliate Kia by 1.6 percent, according to an Oct. 31 research note from Morgan Stanley. Samsung Electronics Co., the world’s largest maker of TVs and mobile phones, would see an estimated 1 percent less profit in 2013 from a 1 percent increase in the won, the report said.

A survey of 160 exporters by the Korea Chamber of Commerce and Industry last month showed that 53 percent said they were already suffering as a result of currency gains. Shipbuilders, steelmakers and textile producers are among the most vulnerable groups, said Sohn Young Ki, head of the chamber’s macroeconomic team.

“The speed of the won’s appreciation is also worrisome, especially given that it’s happening even though the Bank of Korea cut interest rates twice” this year, Sohn said.

Currency Forecasts

The currency, which has risen 6.1 percent against the dollar this year, may strengthen another 0.5 percent to 1080 by the end of 2013, according to the median estimate in a Bloomberg News survey.

To be sure, the won’s rise against the yen isn’t enough to reverse market share gains by South Korean companies against Japanese rivals, according to the Oct. 31 Morgan Stanley report. The won has gained about 11 percent against the yen this year.

The won was 14.8 percent weaker compared with its average level of 929.15 per dollar in 2007, as of yesterday’s close. A level of 1,050 per dollar should be “manageable” for South Korea’s big exporters, said Wai Ho Leong, a senior regional economist at Barclays Plc in Singapore.

TLtek Co.’s Ahn said that earlier this year he projected an operating profit of 2 billion won on sales of 32 billion for 2012. That estimate was based on the won at a range of 1,130 to 1,140 per dollar and an appreciation to 1,050 per dollar would cut his earnings by half, he said.

“The won remained comfortably weak over the past few years, giving us a considerable edge over the prices in the global market,” he said. “Now the heyday seems to be over.”

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