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RPT- Q+A - S.Korea won rallies, but has it turned the corner?
Reuters - Friday, March 13
By Yoo Choonsik
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SEOUL, March 12 - The South Korea won has bounced some 7 percent since touching an 11-year low last Friday, but the rally has limited upside potential in the short term, mainly because of concerns about the country's heavy foreign debt.
The won <KRW=> was trading around 1,496 per dollar on Thursday, up from a low of 1,596.9 last Friday. In the middle of last year, before the global financial crisis blew up, it was trading around 1,000 per dollar.
Offshore non-deliverable forwards suggest the currency will be trading at 1,496 per dollar in three months, little changed from its current spot rate.
Six-month NDFs suggest though that the currency will rise by then some 2.4 percent from its current spot rate.
Here are some questions and answers about the main obstacles hindering the won's <KRW=> sustained recovery:
WHAT SPARKED THE RALLY?
The rally was led by suspected dollar-selling intervention by South Korean authorities as the won fell to 11-year lows and then signs of improving risk appetite among investors world wide.
But investors remain worried about the country's high level of foreign debt, which will limit the upside potential of the currency.
WHAT ARE THE CONCERNS ABOUT THE FOREIGN DEBT?
Investors are worried that South Korean banks and companies will have to scramble to buy dollars in their home market if they fail to refinance maturing foreign debt abroad. Such a scenario would add pressure on the won to fall.
Official figures show South Korea has to pay back or refinance $194 billion in foreign-currency debt this year.
That includes $25 billion owed by domestic banks and $79 billion owed by foreign bank operations in the country.
South Korea's official foreign reserves stand at $201.5 billion, the sixth-largest in the world. The government has insisted they are sufficient to absorb any potential crisis over the foreign liabilities.
But a sell off by foreign investors of their holdings in local stocks, currently worth more than $100 billion, would aggravate existing dollar shortages in South Korea's currency market caused by the global credit crunch.
WHAT IS THE GOVERNMENT'S VIEW
The government says not all of the debt would necessarily be South Korea's responsibility, such as debt owed by foreign bank branches in the country.
In addition, a big portion of the foreign debt is fully hedged, the government says.
South Korea can secure $90 billion through currency swap arrangements with the central banks of the United States, Japan and China. It also has arrangements with other Asian countries.
Government and central bank officials argue that most of the maturing foreign debt is certain to be rolled over and that the actual dollar demand from South Korean banks or companies will be much less than feared.
They also point out that the country's international balance of payments, which set a record deficit in 2008 of $56.4 billion, will improve this year, partly as import costs for energy fall.
HOW MUCH OF A RISK ARE INVESTORS PRICING IN?
South Korea's five-year credit default swap <KOREA5UA=GFI> -- insurance-like contracts that protect investors against defaults or restructuring -- have widened sharply to around 430 basis points from less than 100 basis points early last year.
That compares with around 310 basis points for Malaysia's five-year CDS <MALAYS5UA=GFI>.
Since Korea has a higher credit rating, the CDS levels suggest investors are pricing in higher risks on South Korean debt. Standard & Poor's sovereign rating on South Korea is A, one notch above Malaysia's ratings of A-minus.
Analysts say concerns over South Korea's ability to raise foreign currency could persist until global financial markets stabilise.
Most analysts expect the won to be higher at the end of the year compared with current levels based on expectations that the worst of the global crisis will be over by then.
But the offshore NDF market is not pricing in a return to pre-crisis levels around 1,000 won in coming years. <KRWNDFOR=>
Instead, it sees the won in one year at 1,467 per dollar and after two years at 1,417. LINKS > To track the won, click here.....[KRW/] <KRW=> > To track won NDFs, click here......<KRWNDFOR=>
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