Finance and Economic

South Korea’s won, Asia’s second best-performing currency this year, may be “affected” as the nation’s current-account surplus narrows by about 50 percent in 2010 and capital inflows slow, a central bank official said.

The surplus, forecast to widen to more than $40 billion this year, will decrease by “half next year as domestic demand revives, imports increase and oil prices continue a modest rise,” Ahn Byung Chan, head of the international bureau at the Bank of Korea, said in an interview yesterday. Inflows of investment may be slowed by the global financial crisis, he said.

“The unrest in the international financial markets won’t evolve into a systemic risk but if the wobbles are prolonged, the Korean won rate will be affected,” Ahn said, declining to comment on any level or direction for the currency. “Capital inflows won’t be larger than this year.”

Finance Minister Yoon Jeung Hyun said in October it is “premature” to unwind expansionary policies as the nation still faces risks from a possible delay in the global economic recovery and asset price instability. Exporters helped drive acceleration in economic growth to 2.9 percent last quarter from the previous three months, the fastest pace in seven years.

“This is probably mostly an attempt to talk down the won,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong. “A lot of the economic pickup this year has been due to the earlier won weakness. They wouldn’t want to lose the edge the currency has provided.”

Bullish Forecasts

The won was little changed at 1,155 per at 9:16 a.m. in Seoul, according to data compiled by Bloomberg. It touched 1,149.4 on Nov. 17, the strongest level since September 2008. The currency strengthened 9 percent this year, second in Asia only to the 16 percent gain in the Indonesian rupiah.

The won will rise to 1,070 per dollar by the end of June, Kowalczyk predicted. That is more bullish than the 1,110 median forecast of 22 analysts in a Bloomberg News survey.

The current account swung to a $37 billion surplus in the first 10 months of the year after a deficit of $6.41 billion in 2008, the first shortfall since 1997, central bank data showed. The current account is the broadest measure of trade, tracking the flow of goods, services and investment income.

Foreign-exchange reserves climbed to a record $270.9 billion last month from $264.2 billion at the end of October, the Bank of Korea said yesterday. Reserves slumped to their lowest level in almost four years in November 2008 after the won declined and the global financial crisis made it difficult for companies to refinance overseas debt.

The central bank probably bought dollars to slow gains in the won, Mitul Kotecha, Hong Kong-based head of global foreign- exchange strategy at Calyon, said yesterday.

‘No Complaints’

November’s reserves were boosted by investment inflows and a weaker U.S. dollar which increased the value of holdings in euros and yen. Ahn said the greenback will weaken until the Federal Reserve increases interest rates. He said a stronger greenback won’t necessarily translate to won appreciation.

The competitiveness of Korean companies contributed more to the recovery in exports than a weaker currency, Ahn said. Hyundai Motor Co., the nation’s largest automaker, more than tripled third-quarter profit from a year earlier on a weaker won and surging sales in the U.S. and China.

South Korea’s exports rose 18.8 percent in November from a year earlier, the first increase in more than a year, the Ministry of Knowledge Economy said Dec. 1. Imports rose 4.7 percent, driven by higher consumer spending and fuel costs. Crude oil gained 74 percent this year.

“The Korean won appreciated a lot since March, but still our exports are growing,” he said. “These days there are no complaints among exporters and importers. We decide our exchange rate policy. Their opinion is not important.”

Capital Movements

Foreign investors bought $22.9 billion more local shares than they sold this year through yesterday, helping drive the Kospi stock index 42 percent higher. Stocks fell 4.7 percent on Nov. 27 after Dubai World sought to delay payments on its debt.

“Any similar case to the Dubai shock will slow the inflows,” Ahn said. “A rise in stock prices towards 1,600 reduces incentives for foreigners to jump in.”

South Korea may discuss measures to address inflows of speculative capital that are causing the currency to strengthen, Kim Jong Chang, governor of the Financial Supervisory Service, said on Nov. 19.

“We will watch the global discussions about imposing taxes on capital movements,” said Ahn. “So far, we think capital inflows haven’t had any side effects on the Korean financial market. We are monitoring it carefully.”

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