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Won expected to further gain on fundamentals

The Korean won is expected to strengthen against major currencies as foreign investors reallocate their funds from emerging markets with weak fundamentals such as Indonesia to economies with stable outlooks such as Korea, Asia’s fourth-largest economy.

The won-dollar exchange rate rose 5.2 won to 1,061 won on Thursday as forex officials from the Bank of Korea and the Ministry of Strategy and Finance jointly intervened for the first time this year by openly expressing concerns over the rate “excessively sliding” in a bid to offset a stronger won.

The rate fell to a year-low of 1,054.3 won during afternoon trading, below 1,054.5 won reached in January this year.

Analysts and industry sources said that the Korean won has the potential to gain further to around 1,000 won as the currency is still undervalued given Korea’s sound fundamentals backed by a current account surplus.

“Korea has surpluses on all components of its current account including goods and services. Given its sound fundamentals, the won still has room to strengthen to around 1,000 won,” said an industry source on condition of anonymity.

Global investors are moving their money out of economies with current account deficits to markets including Korea where growth outlooks and fiscal positions are relatively stable.

Indonesia’s continued current account deficit and financial instability would make it difficult for the Southeast Asian country to hit its initial growth forecast of 6.8 percent this year as it recorded a second-quarter growth of 5.8 percent, according to the Korea Institute for International Economic Policy.

The monetary flow from countries such as Indonesia to Korea is spurring demand for the won, boosting Korean stocks despite institutional selling, and raising the value of state bonds.

The benchmark KOSPI closed at 2,046.69, up 0.54 percent on Thursday.

Global securities company BNP Paribas also said that Korea remains “undervalued relative to fundamentals.”

“Korea offers a stable currency due to large external surplus and is undervalued and under-owned by institutional investors, in our view,” it said in a report.

BNP Paribas has changed its investment recommendation for Korea from “neutral” to “overweight.”

The only factor of concern for Korea in the long term is its high household and public debt that can deteriorate the country’s fiscal health, analysts said.

Korea’s household debt accounted for 74 percent of its GDP in 2012, near the level of the U.S.’ 79 percent, according to HSBC Global Research.

By Park Hyong-ki (hkp@heraldcorp.com)

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