Friday, November 07, 2008

South Korea foreign reserves plunge as crisis bites

South Korea foreign reserves plunge as crisis bites

By Seo Eun-kyung and Yoo Choonsik

SEOUL (Reuters) - South Korea spent a record amount of its foreign exchange reserves in October to protect the won from the financial crisis and said a $4 billion currency swap deal with neighboring China would likely be expanded.

As the crisis bites, President Lee Myung-bak on Tuesday urged swift completion of the an $11 billion economic stimulus package announced the previous day and told government ministers to focus on reviving Asia's fourth-largest economy.

The economy ministry vowed to boost next year's exports by 15 percent, almost double the pace predicted by private sector analysts, by expanding financial support to local exporters and exploring markets for industrial plants.

Seoul stock prices jumped more than 2 percent on investor hopes the government's economic package would help keep the economy on track, but the won wiped out Monday's gain as the local short-term dollar-funding situation tightened.

Analysts said foreign exchange reserves turned out to have fallen more than expected but South Korea has now passed the worst point in terms of the foreign-currency liquidity squeeze.

"Earlier worries about it were already overblown," said Lim Ji-won, an economist at JPMorgan Chase, adding the worst was likely over.

Central bank data released on Tuesday showed South Korea's foreign reserves fell a record $27.4 billion during October to $212.25 billion at the end of the month, marking a record seventh consecutive monthly drop.

The Bank of Korea said authorities injected at least $12.7 billion to ease a dollar shortage in the country's money markets, as the crisis dried up dollar credits available to emerging-market countries.


Much of the dollar injection was made on swap deals, meaning the reserves would eventually return when the deals expire.

To head off concern about declining foreign reserves, South Korea tied up a $30 billion bilateral currency swap line with the U.S. Federal Reserve last week and is seeking to expand an existing deal with China.

Vice Finance Minister Kim Dong-soo told reporters the two neighbors, which together hold foreign reserves of more than $2 trillion, have agreed in principle on expanding the arrangement first established under a regional initiative in the aftermath of the Asian financial crisis a decade ago.

Yonhap news agency reported the Bank of Korea has been talking to the People's Bank of China on opening a separate $10-30 billion reciprocal swap line.

But the Bank of Korea said in a statement that while it has proposed the arrangement, there have been no detailed talks.

It did not specifically say whether its proposal was for a separate facility to the existing arrangement which is part of a regional pool.

Kim also said South Korea had no plans to tap the International Monetary Fund for support as the dollar liquidity crunch was not serious enough. He said it could ask for up to $22 billion in support from the IMF in case of an emergency.

Analysts said once South Korea's giddy markets find their footing, the government would next need to steady the real economy, which is heavily dependent on exports.

The economy ministry came up quickly with an ambitious goal of boosting next year's exports by 15 percent to $500 billion, above the market's consensus of around $485 billion, and turning the trade balance into a surplus in 2009.

(Editing by Jonathan Thatcher & Jan Dahinten)

Commentary: Korea spent nearly as much this month as it did in 1997 prior to seeking/receiving IMF loans agreements. Is President Lee Myung Bak's new 12 billion stimulus coming from more high-cost money markets short-term margin loans? Does ordering people to focus on the problem include mediating solutions? The analytical divide in terms of predicting market growth appears political. Should exporters be supported by better export services, fewer documentary/regulatory requirements, revamped and reoriented FDI investment incentives programs similar to those in Thailand? How is JPMorgan Chase performing in terms of its merged and bought-out competitors? Is the IMF being avoided due to its perhaps renewed, revised and better informed agreement terms which perhaps appear political anathema to Koreans at this time? Should the IMF table or promote its regulatory agenda publicly prior to provision of future loans to encourage Korean politicians to listen to their own economists or those at the IMF? Are talks with China challenging due to positional agendas in both nations and negotiation styles which display difficulties in offering or accepting mutually beneficial concessions? Are ambitious expectations of 2009 growth coming at the expense of flexibility in market planning and current modifications of contradictory evidence? Does the Korean Government seek to revise its growth forecasts downward at the end of December?

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