Korea should prepare for worst-case scenario
The Korean economy is bearing the brunt of the rapidly falling value of the won against the U.S. dollar. The local currency closed at 1,345.50 won per dollar Tuesday, down 5.70 won from the previous day. The closing price marked the won's lowest level seen since April 28, 2009.
President Yoon Suk-yeol and financial authorities called for tight risk management in the Seoul foreign exchange market. The Ministry of Economy and Finance verbally intervened in the market by saying that it would step up monitoring of any speculative factors causing the won's slide. But such intervention was not good enough to prop up the won.
More seriously, the losing streak shows no signs of ending. The won has lost about 10 percent of its value against the greenback over the past one year. Some pessimists even predict the Korean currency to fall further to the 1,400 won level, raising concerns about the impact of the weakening won on the economy.
The won's depreciation is attributed to the gaining value of the dollar against other currencies such as the euro, the Japanese yen and the Chinese yuan. Its strength stems from America's aggressive monetary tightening. The U.S. Federal Reserve is set to keep raising its benchmark interest rate after taking a "giant step" of hiking the rate by 75 basis points in June and July to tame inflation.
It seems natural for the won to lose ground as the U.S. interest rate now stands in the range of 2.25 percent to 2.5 percent, higher than Korea's 2.25 percent. The Bank of Korea (BOK) is expected to raise its key rate by 25 basis points Thursday to put it on a par with the U.S. rate. However, the Fed is predicted to make a hike of 50 basis points ― or probably 75 basis points ― next month, putting more downward pressure on the won.
The Yoon administration should work more closely with the financial authorities and regulators to prevent a further weakening of the won against the dollar. The central bank needs to consider ramping up its benchmark rate by a bigger margin to tame runaway inflation and boost the value of the won. Of course, it is difficult for the BOK to raise the rate by 50 basis points or higher, given that individual and corporate borrowers will be forced to pay much more to service their debts.
No one can downplay the dire consequences of a weaker won on the economy and the lives of the people. The continued depreciation of the local currency is no longer a boon to the export-oriented Korean economy. It will increase prices of imported goods which in turn accelerate inflation and then lead to interest rate hikes. Yet again, higher borrowing costs will sap both corporate investments and private consumption, raising fears of a recession.
Another concern is a rising trade deficit amid the won's weakenss. The country recorded a trade shortfall for the fourth consecutive month in July. The deficit will continue this month and beyond. The cumulative deficit has reached a record high of $25.5 billion so far this year. The ratio of the country's short-term foreign debt over its foreign exchange reserves surged to 41.9 percent in June, hitting the highest in a decade. In this worsening situation, the government needs to take proper measures to prepare for a worst-case scenario.
The Korean economy is bearing the brunt of the rapidly falling value of the won against the U.S. dollar. The local currency closed at 1,345.50 won per dollar Tuesday, down 5.70 won from the previous day. The closing price marked the won's lowest level seen since April 28, 2009.
President Yoon Suk-yeol and financial authorities called for tight risk management in the Seoul foreign exchange market. The Ministry of Economy and Finance verbally intervened in the market by saying that it would step up monitoring of any speculative factors causing the won's slide. But such intervention was not good enough to prop up the won.
More seriously, the losing streak shows no signs of ending. The won has lost about 10 percent of its value against the greenback over the past one year. Some pessimists even predict the Korean currency to fall further to the 1,400 won level, raising concerns about the impact of the weakening won on the economy.
The won's depreciation is attributed to the gaining value of the dollar against other currencies such as the euro, the Japanese yen and the Chinese yuan. Its strength stems from America's aggressive monetary tightening. The U.S. Federal Reserve is set to keep raising its benchmark interest rate after taking a "giant step" of hiking the rate by 75 basis points in June and July to tame inflation.
It seems natural for the won to lose ground as the U.S. interest rate now stands in the range of 2.25 percent to 2.5 percent, higher than Korea's 2.25 percent. The Bank of Korea (BOK) is expected to raise its key rate by 25 basis points Thursday to put it on a par with the U.S. rate. However, the Fed is predicted to make a hike of 50 basis points ― or probably 75 basis points ― next month, putting more downward pressure on the won.
The Yoon administration should work more closely with the financial authorities and regulators to prevent a further weakening of the won against the dollar. The central bank needs to consider ramping up its benchmark rate by a bigger margin to tame runaway inflation and boost the value of the won. Of course, it is difficult for the BOK to raise the rate by 50 basis points or higher, given that individual and corporate borrowers will be forced to pay much more to service their debts.
No one can downplay the dire consequences of a weaker won on the economy and the lives of the people. The continued depreciation of the local currency is no longer a boon to the export-oriented Korean economy. It will increase prices of imported goods which in turn accelerate inflation and then lead to interest rate hikes. Yet again, higher borrowing costs will sap both corporate investments and private consumption, raising fears of a recession.
Another concern is a rising trade deficit amid the won's weakenss. The country recorded a trade shortfall for the fourth consecutive month in July. The deficit will continue this month and beyond. The cumulative deficit has reached a record high of $25.5 billion so far this year. The ratio of the country's short-term foreign debt over its foreign exchange reserves surged to 41.9 percent in June, hitting the highest in a decade. In this worsening situation, the government needs to take proper measures to prepare for a worst-case scenario.
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