Land of the Rising Won

From Bloomberg this morning:

South Korean Finance Minister Kwon Okyu said the nation's exporters will cope with the won's surge against the dollar, helping economic growth accelerate next year.

The won reached a decade-high this week and companies such as Hyundai Motor Co. say it will climb further, forcing them to cut costs to boost earnings. Kwon, who expects the won's rally to run out of steam, said rising shipments and a pickup in domestic demand mean the economy will grow 4.8 percent in 2007 and 5 percent next year.

``Even with global dollar weaknesses, Korean exports will continue their robust growth,'' Kwon, 55, said in an Oct. 29 interview in Gwacheon, near Seoul. ``Our competitiveness nowadays doesn't depend on price competition, rather it depends on the quality, technology and so on,'' he said.

Samsung Electronics Co., South Korea's biggest exporter, this year surpassed Motorola Inc. to become the world's second- largest maker of mobile phones behind Nokia Oyj as it focused on more expensive handsets. Exports climbed to a record in October as higher shipments to China and Europe helped cushion the $887 billion economy from a slowdown in U.S. demand.

``Korean exporters have successfully diversified their markets and enhanced their product quality,'' said Kwon Young Sun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``As a result, Korean firms are better placed to weather shocks in individual overseas economies than in the past.''

Chinese Partner

Exports to China surged 33.1 percent in the first 20 days of October from the same period a year earlier, the Commerce Ministry said yesterday. China replaced the U.S. as South Korea's biggest export market in 2003.

Gross domestic product expanded 5.2 percent in the second quarter from a year earlier, the fastest pace in almost two years. The economy has grown in each quarter since the second three months of 2003, the longest continuous expansion since one that ended in 1992.

Between the beginning of 2004 and the end of 2006, South Korea's won climbed 28 percent, making it the biggest gainer among the 10 most actively traded Asian currencies tracked by Bloomberg. Exports, which account for 40 percent of GDP, have grown 19 percent a year on average in the same period.

The won fell 0.4 percent to 907.20 against the dollar at 12:09 p.m. in Seoul.

Kwon yesterday told parliament that the government will continue to buy or sell the currency to curb speculation.

Currency Speculation

``The government is clearly committed to blocking any speculative move'' in the foreign-exchange market, Kwon said at a parliamentary hearing.

Kwon's comments on exporters and the won contrast with those of Kim Dong Jin, Hyundai Motor's vice chairman, who said this week the currency's advance is the ``No. 1 obstacle'' for South Korea's third-biggest exporter.

Kwon and Kim also disagree on the currency's direction. Hyundai's Kim sees further gains. Kwon reiterated his view the currency's advance will cease because demand will fall along with the nation's current account surplus.

``I don't think the currency has reason to appreciate further because the rate is determined by supply and demand,'' Kwon said. He predicts South Korea's current account surplus will drop to zero this year as more Koreans travel and invest overseas, reducing demand for won.

The Bank of Korea estimates the surplus this year will be $2 billion, down from $6 billion in 2006. The government earlier this year relaxed regulations so that individuals can invest more overseas. Some foreign exchange traders said a shrinking current-account gap probably won't be enough to curb the won.

`Wishful Thinking'

``It's wishful thinking to expect a current account deficit to curb the won's gains,'' said Kim Tae Wan, a Seoul-based currency dealer with Kookmin Bank, South Korea's biggest lender. ``New Zealand and Australia have huge deficits but their currencies are rocketing.''

Australia has recorded a current account deficit each quarter since 1973 with the shortfall climbing to a record A$16 billion ($14.6 billion) in the second quarter. The Australian dollar has surged 16 percent this year to a 23-year high. New Zealand's current account gap is 8.2 percent of gross domestic product and its currency has gained 8 percent this year.

Kwon said South Korea's rising demand for electricity gives him confidence to predict a rebound in domestic demand after a slowdown in the second quarter.

Electricity sales climbed 4.2 percent in September, after gaining 6.1 percent in August and 6.6 percent in July, according to Korea Electric Power Corp.

``Electricity demand is still increasing substantially,'' Kwon said. ``That means overall sentiment isn't that bad.''

Kwon said there are still risks to growth, including the U.S. housing recession and record oil prices.

A U.S. slowdown would be mitigated by rising exports to China and India, while the current oil price is ``endurable,'' he said.

The price of crude oil climbed beyond $96 a barrel for the first time yesterday and has surged 57 percent this year. South Korea imports almost all of its oil from abroad.