Morgan Stanley, Goldman Sachs, Merrill Lynch and other major U.S. investment banks in reports on Tuesday, the day after the Bank of Korea drastically cut the key interest rate, said the won and stock prices were undervalued given to the country’s economic fundamentals. They projected the situation would be resolved with time.

Morgan Stanley said the won, which has plunged excessively against the U.S. dollar, had already gone beyond fundamentals. The bank forecast that Korea’s external balance of payments will not worsen since Koreans have invested a lot of money abroad, just as foreign investors have invested a lot into Korea.

Morgan Stanley reiterated that Korea’s foreign currency reserves are 1.4 times larger than its short-term debt, much higher than during the Asian financial crisis, when they were only 0.3 times the size, while more than 60 percent of the short-term debt are in the form of hedging against forex losses and trade credit for exporters, i.e. payables marked as debt. The bank noted that 43 percent of Korea’s short-term debt is held by foreign banks. Morgan Stanley said it is therefore a matter of debate whether to lump all of this into the category of short-term liabilities.

It added that Korea’s current account balance started shifting back into surplus during the fourth quarter, with the fundamental reasons that led to the won’s weakness having the reverse effect of strengthening it against the dollar.

Goldman Sachs also said the won is undervalued and added that it expects it to strengthen in the near future.

Korea’s stock price decline was also viewed as excessive. Merrill Lynch said the fact that Korean shares have dropped around 40 percent over a month shows they have been oversold, even taking into account the risks of lowered profits by listed companies. The investment bank said Korean shares were undervalued since their price earnings ratio had fallen below 8.

The three investment banks all assessed the BOK’s swift rate cut positively.

(englishnews@chosun.com )