The South Korean won on Wednesday sank to its lowest level in four years despite suspected government intervention to prop up the currency, prompting growing talk about a possible currency crisis.
The won slumped for a fourth day, dropping 1.3 per cent to Won1,148.50 against the dollar. It has been Asia’s worst-performing currency this year, having plunged 19 per cent, as foreign investors sell out of the country amid accelerating inflation and slowing growth.
The weakening currency and heavy foreign selling of local stocks has increased concerns that the country may be heading for a financial crisis similar to the Asian economic crisis a decade ago. Foreign investors have sold a net $22.8bn worth of Korean shares this year. But government officials on Wednesday scurried to downplay concerns and reassured investors that the possibility of a crisis was extremely low, citing huge international reserves and strong economic fundamentals.
“We have enough international reserves, which are larger than the optimum level,” Shin Je-yoon, deputy finance minister, told foreign press reporters. “The rumours about a possible crisis this month are completely groundless.” The won has come under further pressure in recent weeks amid investor concerns about the country’s rapidly rising short-term debt. The government is trying hard to dispel fears that about $6.7bn in government debt held by foreigners maturing next week could lead to a large-scale capital flight.
“The Korean market is rather shallow. There are only one-way expectations and so many herd effects at the moment,” said Mr Shin. “The fluctuations are excessive and not desirable. But we believe it will go back to normal soon.”
Several dealers suspected dollar selling by authorities as the won recovered some losses after breaching the psychologically-sensitive level of 1,150 per dollar. But experts predicted that investors would continue to sell the currency as government intervention failed to turn round sentiment.
“Despite efforts by the South Korean authorities in intervening to stabilise and strengthen the Korean won, the market is convinced that there is less reserve ammunition at their disposal to continue to do this as aggressively as before,” Standard Chartered said in a report. The bank expects the won to weaken further to 1,180 by the end of September before recovering to 1,130 by the end of 2008, cutting its forecast from 1,030 and 990, respectively.
Oh Suk-tae, economist at Citigroup, said the rumours about an imminent currency crisis were “exaggerated”. He said the country was unlikely to repeat the 1997/98 economic crisis, citing much stronger corporate and financial sectors. But he cautioned that the country’s credit cycle was worsening and rising household debts were a cause of concern in the long term.
The country’s stock market closed up 1.4 per cent at 1,426.89 on Wednesday, after tumbling to a 17-month low this week.