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Wed, April 14, 2021 | 00:45
Business
Fears of 3Ds Weigh on Economy
Posted : 2009-03-05 17:31
Updated : 2009-03-05 17:31
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Depreciation, Deflation, Daepodong Haunt Korea Inc.

By Kim Tae-gyu
Staff Reporter

``3 Ds'' ― Difficult, dangerous and dirty? No, it is a different set that is haunting Korea Inc. ― a sharp depreciation of the domestic currency, asset deflation and North Korea's Daepodong (Taepodong) missiles.

Leading the triple whammy is the Korean won, which has abruptly lost value against the greenback over the past few weeks due to fresh concerns over a financial crisis.

The won closed at 1,259.5 won per dollar last year, but has depreciated almost 25 percent this year to finish at 1,568, Thursday. The won-dollar exchange rate even approached 1,600 Monday.

``The possibility that some Eastern European countries might default continues to weigh on the won-dollar exchange rate,'' Samsung Securities analyst Kim Seong-bong said.

``The weak won causes overseas investors to run away from the Korean market, and vice versa. This vicious circle is arguably the single biggest concern on the financial market at the moment,'' he said.

Adding woes to the fragile currency is North Korea, which is set to test-fire a long-range missiles. Observers believe they are capable of reaching the U.S. West Coast.

Pyongyang's test-launching of ballistic missiles has wreaked havoc on the Korean won, as demonstrated several times, particularly in 1998 and 2006.

During the following four weeks after the Stalinist country fired ballistic missiles, the won depreciated 3.4 percent in 1998 and 2 percent in 2006.

``In hindsight, the North's missile launches have negatively affected the South's financial markets,'' IBK Securities economist Park Ok-hee said.

``The stock market has been resistant to the missiles but the foreign exchange market has been vulnerable to them. I am afraid that the Korean won will suffer from a further downturn,'' she said.

The final factor is asset deflation, which Korean experts have worried about most since the unprecedented financial tsunami began sweeping the world last October.

``Asset prices have plunged over the past year ― the stock market crashed and the property market slumped causing loss of wealth,'' said Yoo Jang-hee, professor emeritus at Ewha Womans University.

``Declining asset prices tend to result in defaults by households and it will pose a threat to banks here, which extended credit to them,'' he said.

Share prices halved over the past year because of the lingering global financial distress and the value of homes also substantially declined.

Yoo also worried about another harmful repercussion of asset deflation ― diminishing wealth will discourage consumers from spending money.

Such an event, dubbed the negative wealth effect, is known to hold back already-moribund consumption.

``The negative wealth effect explains how the financial crisis burdens the real economy,'' said Lee Geun-tae, a senior economist at LG Economic Research Institute.

``The effect is more important than generally thought because non-government consumption typically accounts for about two-thirds of the economy,'' he said.

voc200@koreatimes.co.kr









 
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