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(LEAD) (News Focus) Stronger won emerging as risk factor for S. Korean economy

All Headlines 16:44 October 28, 2013

(ATTN: UPDATES with market close in paras 7,9)

SEOUL, Oct. 28 (Yonhap) -- South Korean policymakers are increasingly wary of the local currency's steady appreciation against the U.S. dollar as the stronger won is feared to dampen the recovery momentum of Asia's fourth-largest economy, experts say, calling for steps to stabilize foreign capital flows.

South Korea has differentiated itself from other emerging countries that have been struggling to tackle massive foreign capital outflows and currency weakness. But Seoul's strong economic fundamentals are also serving as the main factor in luring cross-border capital funds, putting upward pressure on the won.

Experts said that a stronger won's impact on Seoul's exports have become less sensitive compared with the past, but the sustained appreciation is feared to dent the recovery momentum of the local economy. Exports account for about 50 percent of the local economy.

"Upward pressure on the won remains strong this year as the current account has been in the black and foreign investors have snapped up Korean assets," said Jeon Seung-ji, a currency analyst at Samsung Futures Co. "As Korea is expected to post the surplus run of the current account for next year, the won may further gain ground per the U.S. dollar."

South Korea, a small and open economy, used to be vulnerable to volatile capital outflows and sharp currency depreciation in times of financial crisis.

The country, however, is showing solid performance in the financial sector this time, armed with a piled-up foreign reserves, in a situation where several emerging nations have been suffering from capital flight, hit by speculation over the Federal Reserve's monetary stimulus tapering.

The local currency has appreciated 0.9 percent to the greenback so far this year, and the pace of its gain has expedited since September when the Fed decided to delay tapering its bond-buying program.

The central bank forecast that Korea is likely to post a record current account surplus of US$63 billion this year. Korea's foreign exchange reserves totaled a record high of $336.92 billion as of end-September.

Foreigners bought Korean stocks for the 42nd straight session on Monday, the longest buying spree in history.

Amid foreign capital influx, as the local currency hit a nine-month high of 1,055.80 per the dollar on Wednesday, the finance ministry and the central bank made a joint verbal intervention in the currency market the next day.

They said that the local currency's recent movement is seen as being "excessive," adding that they will take actions to quell herd behavior if necessary.

Finance Minister Hyun Oh-seok earlier said that the pace of the won's gain should be slowed although it should not be pushed in a hasty manner.

Bank of Korea (BOK) Gov. Kim Choong-soo also said Friday that the won's recent movement is seen as being too volatile, adding that the BOK will closely watch whether speculative hot money is flowing into Korea.

Analysts said that as upward pressure may remain on the Korean won, the government should step up efforts to stem volatile foreign capital inflows including additional macro-prudential measures while keeping watch of possible reversal of capital inflows.

Since 2010, South Korea has implemented three measures to curb excessive foreign capital flows, including regulations on banks' foreign exchange forward positions and levies on banks' non-core foreign liabilities.

"I see the need to beef up the macro-prudential steps, and also that the government should look into characteristics of cross-border capital funds," said Lim Hee-jung, a senior economist at the Hyundai Research Institute.

Jeon at Samsung Futures said that the FX authorities will likely slow the pace of the won's appreciation although they are not likely to strive to reverse the won's rising trend.

She said that the local currency may test the 1,050 won level against the greenback this year, cautiously forecasting that the won may gain ground to near the 1,000 won mark next year.


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