The weakening of Korea's currency, the won, to a 17-year low has sparked concerns and a range of economic implications. As a small manufacturing company owner, Kim, shares his experience of the impact on businesses, highlighting the squeeze on profits due to the won's sharp decline compared to the yuan. This is just one example of the broader pressure felt across the economy.
The real effective exchange rate, which measures a country's purchasing power, has fallen to its lowest level in over a decade. This indicator, often overlooked, provides a deeper insight into the currency's true value and its impact on the economy. With an index value of 85.06, Korea's won is among the weakest in Asia, despite traditionally favorable conditions for a stronger currency.
The phenomenon is not solely attributed to a strengthening dollar. Instead, it's a complex interplay of factors. Korea's current account surplus and the Kospi's performance suggest a robust economy, yet the won has weakened significantly. The main culprit is the outflow of foreign capital, with investors selling Korean stocks and converting proceeds into dollars, creating upward pressure on the exchange rate.
The presidential office views this as a necessary cost for economic growth. Kim Yong-beom, the presidential chief of staff for policy, sees it as a sign of success rather than vulnerability. This confidence is rooted in strong semiconductor exports, excess tax revenue, and rising asset prices. However, it's a delicate balance, as the government navigates the challenges of a weak currency.
The Korean stock market's attractiveness to foreign investors adds to the currency pressure. Last year, individual and institutional overseas investment contributed to the won's weakness, but this year, foreign investors have taken center stage. The significant capital outflow is offsetting the current account surplus, with foreign investors selling over 40 trillion won worth of Kospi stocks since the beginning of the month.
The shift in the foreign exchange market is notable. Investors' expectations have changed, with many now considering a 1,600 to 1,700 won range, indicating a potential long-term impact on the exchange rate. The government's response includes proposing a currency swap arrangement with the US to manage volatility, but the underlying issues of low growth and population aging persist.
The real concern lies in the future. External conditions, such as the ongoing Middle East conflict and its impact on oil prices, add to the challenges. The US monetary tightening and potential interest rate hikes could further attract global capital. The rising import costs due to oil prices and the burden on the won are significant concerns. As economist Park Hyung-joong notes, the won's value will rise only when investment extends beyond semiconductors.
The potential side effects of a prolonged weak won era are worrying. As import prices rise and consumer prices follow, the burden on low-income households and financially vulnerable groups increases. If interest rates rise in the second half, it could further strain small businesses and households. Sogang University's Hur Joon-young warns of the gradual accumulation of shocks, like a slow drizzle, which may lead to unexpected consequences.
In conclusion, the weakening of Korea's currency is a complex issue with far-reaching implications. While the government navigates these challenges, the focus on long-term economic fundamentals and a diversified investment landscape is crucial. The won's weakness highlights the delicate balance between global economic forces and domestic policies, and the need for a comprehensive strategy to mitigate potential risks.
