Billion dollar bond shows South Korea is hot – and it knows it

Billion dollar bond shows South Korea is hot – and it knows it

Reuters Sep 6, 2013, 02.12PM IST

SINGAPORE: Korea is hot and it knows it. To prove it, Seoul has just issued a $1 billion 10-year bond that highlights just how different Korea is from the rest of emerging Asia. While Indonesia issues dollar bonds in desperation – and India only in its imagination – to shore up ailing currencies, South Korea did so to flaunt its credentials as Asia’s new safe haven. Demand was so great that Seoul could have issued a bond five times the size. A third of the debt was placed with foreign central banks and sovereign wealth funds – the world’s most prestigious and conservative investors. It marks a dramatic turnaround for a country that was an IMF pupil during the Asian financial crisis 16 years ago and traditionally gets hammered, along with Indonesia, Thailand and Malaysia, when investors sour on Asia’s emerging markets.The difference this time is surpluses. While many emerging Asian economies are struggling with ballooning current account deficits – twinned with fiscal deficits in India and Indonesia – South Korea is basking in record current surpluses , record foreign reserves, low government debt and a stock market that many analysts think is undervalued.

Financial markets tell the story of this success. The won has rallied by more than 6 per cent against the dollar over the past 10 weeks since hitting a 2013 intraday trough in late June.

That is in stark contrast to an 11 per cent slide in the Indonesian rupiah, a 10 per cent drop in the Indian rupee , a 4 per cent fall in the Thai bhat and a 3 per cent drop in the Malaysian ringgit over the same period.

South Korean stocks are also outperforming regional peers, up 11 per cent since the June 25 trough. India’s benchmark BSE index, by comparison, is up just 3 per cent, while Indonesia’s composite index has dropped 8 per cent over the same period.

Won-denominated government bonds have also been outperforming both regional peers and US Treasuries, with the latest balance of payments data for July showing portfolio inflows were concentrated in bonds.

Three-year Korean yields have risen 6 basis points (bps) since early August, compared with a 40-point move in comparable US Treasuries and an 84 bps rise in 3-year Indonesian rupiah bonds.

South Korea is also one of the few emerging markets that looks able to withstand the US Federal Reserve’s expected winding down of its ultra-loose monetary measures soon – with expectations growing that it could happen as early as this month.

“There are push and pull factors driving money out of emerging markets right now,” said an equity strategist at a foreign bank in Hong Kong. “The pull factor is the Fed tapering its stimulus measures and the push factors are widening current account deficits in emerging markets, which is putting currencies, growth and governments under pressure.

“Korea is different in that while it’s still vulnerable to the impact of Fed tapering, there aren’t really any push factors driving money out of the country.”
  MONEY FLOWS

Central bank and stock exchange data shows that a hefty $143.72 billion has flowed into Korean stocks and bonds since the Fed began printing money to buy US Treasuries back in November 2008, so clearly there is scope for money to leave as reduced Fed stimulus pushes Treasury yields higher.

However, fund flows since May 22, when the Fed first indicated it would probably start returning to more orthodox monetary policy later this year, illustrate that, while higher US rates will be attractive, investors are in no rush to flee.

Fund flows into South Korea are up $1.89 billion since May, even as other emerging Asian markets have been sold off heavily.

Korea has become a darling of dedicated Asian emerging market investors, who have to invest in the region and who have moved money out of Southeast Asia and into Korea instead.

The South Korean government is aware of its growing status.

Sung-Hwan Choi, director general of the Korean ministry of finance’s international division, which handled the recent bond issue, told IFR that “amidst the recent market volatility Korea has been seen as a stable safe haven”, and that this was why Seoul took the opportunity to make the bond a benchmark issue that would serve as a reference for other Korean borrowers.

But while Korea has a strong story that is certainly better than many other Asian emerging markets, some analysts said it might be too soon to consider the country a true haven.

“It is not a safe haven yet. It is not as deep enough as most of the safe haven currencies and also there is always the risk that crisis with North Korea may develop,” said Saktiandi Supaat, head of FX research for Maybank in Singapore, who was nevertheless upbeat that the won would strengthen.

South Korea’s success as the world’s seventh-largest exporter underpins its strong foreign trade balance, led by such increasingly competitive global vendors as tech giant Samsung Electronics, automaker Hyundai Motor and shipbuilder Hyundai Heavy Industries.

“The won may continue back to its pre-2008 crisis trajectory firmer towards 1,000,” said Supaat. “The won is different from five years ago, thanks to increases innovation and better breakthroughs into the US and global consumer market.”

Barclays, in a recent research note, also said the won could rise further because it remained undervalued in trade and inflation-adjusted returns.

“Despite being a regional outperformer in recent months, the KRW real-effective-exchange-rate remains well below its 20-year average,” the note said.