By Kim Jae-won
Korea is trapped with soaring energy costs, a strong currency and high consumer prices, which are hampering the Lee Myung-bak administration’s efforts to boost the economy in its last year in office, analysts said Monday.
Experts say policymakers are in trouble as they have few cards to deal with the terrible mix. The oil price hikes are largely due to international sanctions involving Iran, while they have struggled to bring soaring inflation under control. They are also hesitant to intervene in the foreign exchange market.
“The country is in trouble but officials have few tools to tackle the situation. For example, the government could spend its foreign exchange reserves to devalue the currency so as to help exporters,” a Seoul analyst said.
“Global companies here would be happy with the measure. But people would not because a weak currency would lead to higher inflation due to the rise of import prices. In particular, it will increase the already-high import prices of crude oil.”
As tensions between the United States and Iran deepen on the latter’s alleged nuclear weapons development program, the price of Dubai crude, Korea’s benchmark, reached $122.25 per barrel Friday, up 17.1 percent from the end of last year, according to the Korea National Oil Corp.
Experts say that if it hits $135 per barrel, Korea’s economic growth rate would plunge below the 3-percent mark, which would be much lower than the nation’s official target of 3.7 percent.
The Korean won has gained strength of late on the back of solid demand for the currency from foreign investors who are flocking to the nation’s stock and bond markets amid the eurozone debt crisis and the low growth of the U.S. economy.
The won-dollar exchange rate closed at 1,115.5 won Friday, up 40 won or 3.5 percent from earlier this year. Korean exporters complain of the strong won, saying it is weakening price competiveness in overseas markets.
However, as things stand, the government can’t opt to devalue the won due to its negative impact on prices.
Soaring inflation plagued the government last year and it will remain a headache. The nation’s consumer price index marked a 3.1 percent rise in February from a year ago, the lowest in 15 months, but market observers argue that the figure could jump at any time.