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Hyun Sees Won Pressured Higher as South Korea Surplus Surges

South Korea Finance Minister Hyun Oh Seok
Hyun Oh Seok, South Korea's finance minister, speaks during an interview in Seoul on Aug. 28, 2013. Photographer: SeongJoon Cho/Bloomberg

South Korea’s current-account surplus, forecast to hit a record this year, will put “upward pressure” on the won, Finance Minister Hyun Oh Seok said.

“The size of the current-account surplus this year is forecast to be bigger than last year,” Hyun said in an interview yesterday in Seoul. “That means it’s unavoidable to have upward pressure on the won.”

Hyun, 63, said that Korean exporters are less sensitive to the exchange rate than they used to be and he expects resurgent domestic spending will ultimately boost imports and help reduce demand for the local currency. The finance minister, who was appointed in March, also spoke about the risks posed by U.S. Federal Reserve tapering and an economic slowdown in China, and said it wasn’t clear when the country would balance its budget.

South Korea’s current-account surplus is enabling Asia’s fourth-biggest economy to keep interest rates low to support growth just as other emerging markets raise borrowing costs to protect their currencies, with Indonesia moving today and Brazil yesterday. At the same time, a slowdown in investment by local companies has prompted President Park Geun Hye to consult with executives about regulatory changes that would help create jobs and boost wages.

The surplus in the broad measure of trade will rise to $53 billion this year from $43 billion last year, according to a Bank of Korea forecast last month. The excess for July was $6.8 billion, from $7.2 billion in June.

Capital Inflows

The won traded at 1113.18 per dollar as of 9:21 a.m. local time, a gain of 0.2 percent for today and about 4.9 percent stronger than the five-year average rate. South Korea’s currency has weakened about 4.4 percent against the dollar this year, while the Indian rupee has tumbled about 20 percent and the Brazilian real has declined about 13 percent.

“Incurring a surplus would definitely push up the won and this will increasingly be an important factor,” said Jeong Young Sik, a Seoul-based economist at Samsung Economic Research Institute. “Should emerging economies continue to experience turbulence, investors will rely more on current-account data to determine economic fundamentals and this will attract more foreign money into Korea.”

Hyun said he joined a luncheon President Park held yesterday with executives from companies including Samsung Group and Hyundai Motor Co. to encourage them to boost investment. At the meeting the president asked what sort of regulations were hampering investment, he said. The government is planning a package of deregulatory steps, Hyun said earlier this month.

Revitalizing Investment

Facility investment by South Korean companies fell 1.9 percent in 2012 after a 3.6 percent increase in 2011. The central bank projects a 1.8 percent gain this year, according to a July statement.

“Big companies have considerably large amounts of cash holdings,” Hyun said. “So if the outlook improves, business conditions improve and regulations improve, then corporate investment activity will be revitalized.”

South Korea has bolstered its defenses since its economy was embroiled in a regional financial crisis in the late 1990s, leading to a bailout from the International Monetary Fund. The country built up foreign-exchange reserves to a record $329.71 billion as of end-July and reduced short-term external debt.

While South Korea stands unscathed by emerging-market turmoil triggered by anticipation of the Fed winding back stimulus, Hyun said that “we need to closely monitor the situation.” Fed policy moves will flow through financial markets “so I cannot say that Korea is completely immune,” he added. “We can absorb shocks, to some extent.”

Export Outlook

The finance minister spoke about the trade risks from a Chinese slowdown, saying the impact on South Korea could be limited. Korea supplies components for products that are assembled in China for sale in other markets.

South Korea’s biggest export market has already shifted down a gear from its 10 percent average economic growth of the past decade, with economists forecasting a 7.5 percent expansion this year in China. Still, South Korea’s exports are set to grow about 5 percent in the second half of the year, Hyun said. Exports increased 0.6 percent in the first half, after falling 1.3 percent in 2012, according to the customs service.

Academic Connection

Hyun, who is three years younger than Bank of Korea Governor Kim Choong Soo, followed a similar academic and career path. They went to the same schools -- Kyunggi High School and Seoul National University -- and then both completed doctorates in economics at the University of Pennsylvania.

Both also headed the nation’s biggest state-run research center, Korea Development Institute, which was founded by former dictator Park Chung Hee, father of the current president. As KDI’s president, Hyun advised Kim on policy until Hyun became deputy prime minister and finance minister in March under Park.

South Korea will have a fiscal deficit of 1.8 percent of gross domestic product in 2013, worse than last year’s 1.4 percent, according to government projections released when the parliament approved an extra budget in May.

Hyun said he “cannot say” by when the nation will achieve a goal of balancing its books, citing factors including a decline in tax revenue. “All I can say is that fiscal consolidation is the most important issue that the government keeps in mind,” he said.

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