HSBC Bets on Won Rally as Korea Politics Frowns on Conglomerates

Korean Won Drop
South Korean won bank notes are arranged for a photograph in Seoul, South Korea. Photographer: SeongJoon Cho/Bloomberg

South Korea’s won will extend Asia’s best rally since June on speculation the nation will elect a new president next month who is more willing to tolerate a stronger currency, HSBC Holdings Plc and Barclays Plc analysts said.

The three leading contenders have pledged to support small companies that rely on imports over family-run conglomerates, known as chaebol, that account for most of the nation’s exports. Frontrunner Park Geun Hye, the ruling New Frontier Party’s nominee, Moon Jae In, an opposition lawmaker, and Ahn Cheol Soo, an independent, favor a market-determined exchange rate and limiting the influence of large businesses on an economy driven by overseas sales, according to members of their campaign staff.

“Whichever party wins, they are likely to show more tolerance of won appreciation to strike a better balance between big groups and small, medium-sized enterprises and consumers,” Ju Wang, a senior foreign-exchange strategist for HSBC in Hong Kong, said in a Nov. 16 telephone interview. “Consumers have been hurt by high import prices, and smaller companies suffer indirectly. A weak won helps the chaebol.”

The won has advanced 5.4 percent since June, the most among the 11 most-traded Asian currencies, as monetary easing in developed nations spurred inflows into emerging-market assets and the nation received sovereign rating upgrades. HSBC predicts a 3.5 percent gain to 1,050 per dollar by the end of 2013, more bullish than the 1,075 median estimate of 22 economists in a Bloomberg survey. Koreans vote Dec. 19 to elect a successor to President Lee Myung Bak, whose five-year term ends in February.

‘Smoothing’ Operations

The won retreated from a 14-month high yesterday after Deputy Finance Minister Choi Jong Ku said action is needed to curb excessive moves. Finance Minister Bahk Jae Wan said Oct. 9 the government conducts “smoothing” operations to check volatility.

“It’s important to make the currency market transparent so that the exchange rate can reach appropriate levels,” Ahn said at a Nov. 19 press briefing in Seoul. “Still, it’s the government’s role to smooth abnormal and excessive movements in the won.”

In the past five years, the won has weakened 14 percent against the greenback and is currently 3.8 percent below its daily average in August 2008, the month before the bankruptcy of Lehman Brothers Holdings Inc. triggered the deepest global recession since World War II. The Japanese yen has strengthened 32 percent against the dollar since November 2007, while China’s yuan appreciated 19 percent in the same period.

Barclays Forecast

Under the next administration, the “style of intervention may not be as heavy handed as before,” Wai Ho Leong, a senior regional economist at Barclays in Singapore, said by e-mail on Nov. 19. Still, “we expect the authorities to continue to guard the pace of won appreciation to prevent one-sided expectations building up.”

Barclays forecasts the currency will strengthen to 1,050 per dollar in the next 12 months.

The presidential race has turned the spotlight on the cost of pursuing export-led economic growth as South Korea’s income gap widens. The nation’s Gini coefficient, which measures income inequality, rose from 0.306 in 2006 to 0.311 in 2011, according to government statistics. Zero represents perfect equality and a level of one signifies perfect inequality, with one person holding all the wealth.

Gross domestic product growth slumped to a three-year low of 1.6 percent last quarter as Europe’s debt woes crimped demand for the nation’s goods. Exports account for about half of the $1 trillion economy.

Largest Conglomerates

The 30 largest chaebol, including Samsung Electronics Co. and Hyundai Motor Co., accounted for 84 percent of South Korean exports in 2010, according to latest figures from the Federation of Korean Industries, which represents the nation’s biggest companies. Only 15 percent of sales of smaller manufacturers were to customers abroad, data from the Korea Federation of Small and Medium Business show.

Ahn, the founder of Ahnlab Inc., South Korea’s biggest antivirus software maker, has campaigned to gradually break up crossholdings by conglomerates to weaken the grip of the controlling families. His deputy spokesman, Hong Seok Bin, said in a Nov. 16 telephone interview that past administrations have kept the won weak to help exporters.

Moon, the candidate of the opposition Democratic United Party, has created as part of his campaign a so-called Economy Democratization Committee that advocates policies favoring small enterprises. Currency intervention isn’t desirable, Lee Joung Woo, who heads the panel, said by telephone on Nov. 19.

Campaign Merger

Ahn and Moon are in talks to merge their campaigns after they fell behind in the polls to Park, whose late father Park Chung Hee helped build up the chaebol in the 1960s and 1970s during his time as the country’s longest-serving military dictator.

Park leads the race with a support rate of 44.7 percent, according to a poll published Nov. 23 by Seoul-based Realmeter. Moon, a former human rights lawyer, is second on 25.6 percent, with Ahn is on 23.4 percent. The survey of 1,500 people has a margin of error of 2.5 percentage points.

“We should change the current economic system dominated by big business groups to a one where small and medium-sized enterprises develop together,” Park said in a Nov. 16 statement on her official website.

The won will strengthen as South Korea’s competitiveness improves, and the government shouldn’t seek to artificially weaken the currency to help exporters, Kang Seoghoon, an economic advisor to Park, said by telephone Nov. 21.

Tax Incentives

Support for small businesses and entrepreneurs under the next administration is more likely to come by way of fiscal measures such as tax incentives, rather than through a change in currency policy, said Craig Chan, the Singapore-based head of Asia ex-Japan foreign-exchange strategy at Nomura Holdings Inc. The government will prefer to keep the won relatively weak because the economy remains export driven, he said in a Nov. 15 telephone interview.

South Korea’s overseas sales unexpectedly rose 1.1 percent in October from a year earlier, while factory output expanded at the fastest pace in four months in September from the previous month, the latest official figures show.

Speculation that a stronger currency will hurt exports is “overstated” as manufacturers gain competitiveness, according to Chia-Liang Lian, the Singapore-based head of investment management for Asia excluding Japan at Western Asset Management Co., which oversees $446 billion globally.

“Korean manufacturers are now much less sensitive to the exchange rate,” Lian said in a Nov. 16 telephone interview. “There is room for the won to strengthen at a pace consistent with the country’s improving fundamentals. Greater flexibility will ultimately enhance the scope for short-term policy adjustment and bolster longer-term growth sustainability.”

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