Exports, Stocks Boom Despite Strong Won
By Na Jeong-ju
Staff Reporter
A stronger won against the dollar used to weaken exports, negatively affect the stock market and force companies to shift to damage control mode. But these days the general economic theory seems to be not applicable in Korea.
This conventional wisdom seems to be no longer working in such a simple and one-way direction. Economists are seeing a change in the way the economy responds to the won's appreciation.
Despite the strong currency, exports are growing at double-digit rates. Major companies reported record earnings and the stock market is revising records almost daily.
The Korean currency has appreciated more than 40 percent against the dollar over the past five years on current account surpluses and generally weak dollar sentiment. Last year alone, the won gained 8.8 percent against the greenback, recording the highest appreciation rate among Asian currencies after Thailand's baht, and the growth momentum has continued this year.
The won's strength has made Korean products more expensive on global markets, and, in theory, Korean exporters should see a drop in overseas demand, but instead their exports have surged.
In June, exports increased 15.9 percent from a year ago to an all-time high of $32.39 billion. The country posted a trade surplus of $3.94 billion in June, remaining in the black in its trade balance for 51 months in a row.
In the first half, exports grew 14.7 percent from a year ago, surpassing last year's growth of 13.8 percent.
In line with the exports growth, stock prices have continued their bull run in recent months. Many analysts now expect the benchmark index to breach 1,900 points in the coming weeks, and rise above 2,000 toward the end of the year.
Then how has the country accomplished such impressive results in exports and stock prices despite the won's strength?
Analysts believe that stronger corporate and economic fundamentals underlie the market's strength. Their optimism is based on expectations that enterprises will post stronger earnings and the economy will become more positive in the remainder of the year.
Many analyst worry strong exports growth and the continued rise in the value of the Korean currency have failed to translate into larger corporate investments and consumer spending.
Yeo Eun-jung, a research fellow at the Korea Institute of Finance, said the recent sharp rises in stock prices don't reflect economic conditions fairly, so the stock prices may enter a correction phase over the short term.
``As long as domestic consumption and corporate investment remain sluggish, stock prices won't be able to gain growth momentum,'' Yeo predicted.
Yeo said companies and consumers react differently to the central bank's monetary policies.
Until 2001, a call rate hike caused a decline in stock prices and weaker corporate investments and consumer spending. However, since 2002, stock prices have risen and consumption growth gained strength after the central bank raised its call rate.
``This is because the market has seen a steady rise in money supply since 2002 amid low interest rates,'' Yeo said.
``Considering the bright outlook for the growth of domestic consumption in the second half and strong exports, the central bank is expected to take measures soon to absorb liquidity in the market,'' said Lee Sang-jae, a researcher at Hyundai Securities.
``Last month, consumer prices grew slower than earlier expected despite rises in global oil prices, and the prices of farm and fisheries products showed signs of declining. This bodes well for a tighter monetary policy from the central bank.''