http://www.bloomberg.com/apps/news?pid=206...orld_currencies

Korea Won May Fall on Bank Risk, Morgan Stanley Says (Update1)

By Kim Kyoungwha and Patricia Lui

May 7 (Bloomberg) -- South Korea's won may add to its 8.8 percent loss this year as the country is poised for a ``monetary shock'' from overstretched local banks, according to Morgan Stanley, the second-biggest U.S. securities firm by market value.

Credit-market losses will make it difficult for Korean banks, which have extended 1.33 times more loans than their deposits, to get funding, Stewart Newnham, a Hong Kong-based currency analyst, said in an interview today. A cut in interest rates by the central bank will encourage banks to lend and an increase may raise the burden for consumers to repay loans, Newnham said.

The won is the worst performer among the world's 16 most- active currencies in 2008 as overseas investors dumped the nation's stocks on signs the economy is cooling. A fourth month of current account deficits in March due to record oil prices and slowing export growth also deterred investors.

``The shock is that Korea's monetary situation may have worsened to such a degree that whichever policy action the Bank of Korea now takes, it will have a negative impact on the won,'' Newnham said. ``We now recognize that the won faces a new source of instability, a monetary shock.''

Any relaxation in the bank's monetary stance will encourage banks to continue lending and inflate the stock of money, while rate increases could destabilize the economy by eventually collapsing the overly stretched banking system, Newnham said.

Newnham declined to provide a forecast for the currency, which fell 1.1 percent to 1,026.10 against the dollar as of the 3 p.m. close, the biggest decline since March 17, according to Seoul Money Brokerage Services Ltd.

Predictions Vary

United Overseas Bank Ltd., Singapore's second-largest lender, revised its year-end forecast for the won to 980 per dollar instead of 920, in a research note yesterday. In the first four months of 2008, investors abroad sold 14.8 trillion won ($14 billion) more Korean shares than they bought, compared with total net sales of 27.2 trillion won in 2007, the report showed.

The won's loss is also underpinned by a deteriorating trade surplus and exporters' hedging, UOB strategists Ho Woei Chen and Jimmy Koh wrote in the report.

Analysts and economists surveyed by Bloomberg News over the past month are giving different views on the won's outlook. The currency will trade at 980 to the dollar by June 30 and 972 by the end of the third quarter, according to the median estimate in the survey. Estimates ranged from 900 to 1,100 by Sept. 30.

Goldman Sachs' economist Kwon Goohoon wrote in a research note today that the won ``could strengthen somewhat against the dollar from current levels'' should interest rates stay on hold.

Liquidity Risk

The Bank of Korea is losing control over the money supply as Korean banks continue to bolster lending, fueling inflation and increasing the risk of a ``liquidity crisis,'' Morgan Stanley's Newnham said.

``Our call for calmer waters ahead may have proven to be premature,'' Newnham said. ``These ongoing liquidity risks continue to undermine the won.''

M2 money growth accelerated 13.9 percent in March, compared with February's 13.4 percent, Bank of Korea data showed today. South Koreans' ability to repay debt has weakened, the central bank said on May 1. The ratio of interest payments to disposable income climbed to 9.5 percent last year from 9.3 percent in 2006.

Central bank Governor Lee Seong Tae and his six colleagues meet tomorrow to review rates. Thirteen of 20 economists surveyed by Bloomberg forecast the seven-day repurchase rate will stay unchanged at 5 percent, while seven expect a cut. Policy makers last adjusted the benchmark with a quarter-percentage point increase in August.

``Whatever policy direction the Bank of Korea now takes, ease or tighten, we think it will be potentially negative for the won,'' Newnham said.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net. or Patricia Lui in Singapore at 2658 or plui4@bloomberg.net

Last Updated: May 7, 2008 04:16 EDT

This is even a shock to me, an outsider.
Why is South Korea in an almost emergency economic state in danger?
Isn't the U.S.A = South Korea's buddies suppose to be helping out and helped make South Korea more advanced and democratic then their so called poorer brother North Korea?

I have a funny feeling South Korea will convert to the al'mighty U.S greenback, the heritage of the Korean Won($) will be history. South Korea will turn into places like Guam or Puerto Rico also U.S territories who;s currency is the U.S greenback.

You are right. SK's banking sector is only getting worse.

South Korea's Inflation Probably Accelerated to Nine-Year High

South Korea's inflation probably accelerated to more than 5 percent for the first time since 1998, adding pressure on the central bank to raise interest rates.

The consumer-price index jumped 5.4 percent in June from a year earlier, according to the median estimate of 18 economists surveyed by Bloomberg News. Exports climbed 20.2 percent, after a 26.9 percent jump in May, a separate survey showed.

Oil prices have doubled over the past year, pushing inflation above central banks' comfort zones and threatening to derail economies across the region. Bank of Korea Governor Lee Seong Tae said on June 12 inflation is a bigger risk to the economy than slowing growth.

``Policy makers are facing a serious dilemma as economic growth slows and inflation accelerates,'' said Oh Suk Tae, an economist at Citibank Korea Inc. ``The central bank seems to have no option but to raise interest rates if oil prices remain high.'' Oh expects two quarter-percentage-point increases within the next three months.

Taiwan, India, Indonesia and the Philippines have all lifted borrowing costs in the past month to fight rising prices.

Inflation will probably accelerate this month after setting a seven-year high of 4.9 percent in May and breaching the central bank's target range for a seventh month, Finance Minister Kang Man Soo said on June 25. The central bank aims to keep inflation between 2.5 percent and 3.5 percent, on average, for the three years to 2009.

The Bank of Korea left interest rates at a seven-year high of 5 percent on June 12. Its next meeting is on July 10.

Korean won is down the most out of all major currencies against he dollar this year. Of course it was up a lot over the past few years. Korea banks don't seem to be leveraged more than any other banks. The 1.33 x 1 loan to deposit ratio isn't that bad as long as they maintain an adequate capital ratio and deposits on hand.

Tell me which other banks are leveraging more?