ID :
37260
Thu, 12/25/2008 - 09:31
Auther :

(Yearender) Credit crunch, weak economy hit financial markets

By Kim Soo-yeon
SEOUL, Dec. 24 (Yonhap) -- South Korea's currency and stocks took a beating from
a credit crunch and a global economic slump this year as foreign investors dumped
local shares in search of safer assets, analysts say.
But they predict that local markets will gain ground toward the end of 2009 if a
slew of global rate cuts and economic stimulus packages prove to be effective in
shoring up the slowing economy.
The local currency has declined nearly 30 percent to the U.S. dollar so far this
year, becoming one of the world's worst-performing currencies. The country's key
stock index has fallen about 40 percent this year after peaking at above the
2,000-point mark in late October 2007.
Analysts say a shortfall of the current account, coupled with rising overseas
debt and a selling spree of local stocks by foreign investors, has been putting
downward pressure on the local currency.
"The won sharply weakened this year because dollar liquidity has been squeezed
while demand for the greenback remained strong amid a global economic slump and
higher oil prices," said Jeon Seung-ji, a currency analyst at Samsung Futures
Inc.
"The government's earlier stance of seemingly allowing the won to move downward
also prompted market players to bet on the won's weakness."
Offshore investors have dumped a net 34 trillion won (US$25.9 billion) worth of
local stocks so far this year as they tried to secure liquidity amid a global
slowdown and a credit squeeze.
A cumulative shortfall in South Korea's current account has also dealt a blow to
the local currency. Asia's fourth-largest economy logged a record current account
surplus in October, but its combined deficit reached $9 billion in the
January-October period.
According to the Bank of Korea (BOK), the central bank, the nation is widely
expected to log a current account deficit of $4.5 billion this year, marking the
first annual shortfall in 11 years.
Since early March, the Korean currency has slid at a faster pace amid a global
credit crunch and a controversial government preference for a weaker won to boost
exports, which also puts upward pressure on inflation.
In a bid to fight inflation, the government and the BOK pledged in early July to
prop up the weakening local currency by offloading some of the country's foreign
exchange reserves, but their efforts effectively failed to bear fruit as the
collapse of Lehman Brothers Holdings Inc. tightened the credit squeeze, sparking
demand for the safer greenback.
The Korean currency tumbled to a near 11-year low of 1,513 won to the dollar on
Nov. 24, as offshore investors cut their holdings of local stocks amid recession
woes. The benchmark Korea Composite Stock Price Index (KOSPI) hit a yearly low of
892.16 on Oct. 27 after hitting a closing high of 2,062.92 in late October last
year.
However, South Korea's $30 billion currency swap agreement with the United States
in late October helped ease fears over a dollar shortage and falling foreign
exchange reserves. South Korea also reached new currency swap arrangements with
China and Japan in December, expanding its existing swap lines with the two
countries to $30 billion each.
Concerns have been mounting over South Korea's foreign reserves, which total
$200.51 billion and are the world's sixth-largest. The reserves declined for the
eighth straight month in November as foreign exchange authorities injected
dollars into the financial system in an attempt to ease a liquidity crunch and
stabilize the won.
Experts say the local currency is widely expected to firm up toward the end of
2008 as the current account has been heading into the black since October and a
sell-off of local stocks by foreign investors recently showed signs of abatement.
"A recent steep rate cut by the U.S. Federal Reserve weakened the dollar
globally. Foreign exchange authorities' potential dollar sale would help boost
the won's end-year value," Jeon said, adding that the local currency is likely to
rise above the 1,200-won level to the greenback by the end of this year.
But many economists still expect the Korean currency to suffer further in the
first quarter or in the first half of 2009, saying that a global economic
downturn will be in full swing. However, the won is widely expected to gain
strength to the dollar toward the end of next year, they added.
"The won could be under downward pressure again in the first quarter or probably
until the first half as concerns persist over a funding squeeze at local banks
and builders' bankruptcy risks amid the cooling economy," said Shin Jin-ho, a
currency analyst at Woori Futures Co. "Faltering exports also will make it
difficult for the country to post a large current account surplus next year."
Jeon at Samsung Futures said the local currency is expected to gain ground toward
the end of 2009 as the effects of rate cuts and economic stimulus packages may
begin to be felt in the second half, adding that the Korean currency will likely
trade at the 1,150-won level per the dollar at the end of next year.
sooyeon@yna.co.kr
(END)

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