Trade Surplus Expected in February



Financial Market in Jitter Again

By Yoon Ja-young
Staff Reporter

The Korean financial market is bracing for another mini-crisis in March with the local currency falling 16 percent against the dollar this year, the highest depreciation among all major global currencies against the greenback, as the KOSPI dropped below 1,100 last week.

The Ministry of Knowledge Economy estimated a $2.5 billion trade surplus this month, Sunday, despite exports contracting by 10-15 percent from a year ago.

It forecast that the current account will see a $3.5 billion surplus in February, a major turnaround from last month, when the country posted a trade deficit of $3.4 billion.

The surplus is expected to contain the looming financial market instability.

Finance and Strategy Minister Yoon Jeung-hyun has ruled out the possibility of another financial tsunami jolting Korea in March, but the premium on credit default swaps (CDS), a key barometer of the health of the economy, has jumped to 4.28 percent, up from the 2-percent range last month. The risk premium rose mostly because of credit default risks in East European countries, the possibility of GM going into bankruptcy and North Korea's threat to test-fire a ballistic missile.

Seoul analysts predict any financial trouble might have less of a ripple effect this time than in September but it might delay the long-awaited economic recovery. The economy has been contracting at a record pace ― it shrank by 3.4 percent in the fourth quarter of 2008 and this contraction appears to be continuing. Minister Yoon has predicted the economy could post minus 2 percent growth this year, unless another stimulus package is adopted.

Stock markets are swooning and the won is losing its value against the background of an inauspicious set of developments in Eastern Europe, fueling the fire of the ``March Crisis'' scenario that government officials have been trying to put out. The next couple of weeks are likely to prove crucial, although the situation is not as bad as last September before the onset of the global financial collapse.

Financial markets are showing uneasy sign. Foreign investors recorded net selling on the stock market for nine consecutive days until last Friday amid the soaring won-dollar rate. The won closed at 1,505 per greenback, Friday, losing 125 won in value over the past nine days, and the weakest level since Nov. 24, 2008 when it closed at 1,513. The weakening won is coupling with the weak stock market, where the main index closed at 1,065.95, plunging 41.15, or 3.72 percent, from the previous day's trading.

However, some analysts say that the situation is not as gloomy as last September. In January, foreigners sustained the stock market, buying 652 billion won worth of shares on the Seoul bourse. This contrasted with the five trillion won sell-off in June and July 2008. Foreign investors faced serious liquidity problems in September, prompting them to sell the stocks. This isn't the case this time, analysts say.

The bond market is in much better shape compared with then when the crisis hit the country. Foreigners bought over two trillion won in the over-the-counter bonds market in February, compared with a 6.4 trillion won sell off last October.

Analysts explain that this means foreign investors still trust Korean assets, though over 70 percent of their bond trade is arbitrage based on interest rate gaps. The market interest rate rebounded in February, inducing foreigners to invest in Korean bonds.

``The March crisis scenario is overly exaggerated,'' said Cho Sung-jun, an analyst at Meritz Securities. ``The point, however, is that a crisis scenario could repeat anytime as the global financial market is bad enough to increase uneasy sentiment,'' he added.

The sentiment is likely to get worse this week with concern over a second wave of global financial market trouble starting from Eastern Europe looming. Also, the lack of foreign exchange liquidity for local banks isn't getting better. KDB Economic Research Institute estimated that the won/dollar rate could surge to 1,550 won as the financial problems expand.

Cho said that visible figures such as sustaining foreign exchange reserves and the current account surplus are needed for the country to break free from a repeating crisis scenario.

chizpizza@koreatimes.co.kr