Korean won's sharp fall feared to stymie economic recovery

Electronic signboards at a dealing room of Hana Bank in Seoul show the benchmark KOSPI fell 1.10 percent to 2,435.34 points while the Korean currency slid 5.70 won to close at 1,345.5 per dollar, Tuesday. Yonhap

By Yi Whan-woo

• Published Aug 24, 2022 8:32 AM KST
• Updated Aug 25, 2022 3:05 PM KST

Local currency could dip as low as 1,400 won per dollar: analysts

By Yi Whan-woo

A sharp depreciation of the Korean won against the U.S. dollar is adding woes to Asia's fourth-largest economy on its path to recovery, by worsening the trade deficit, decades-high inflation and other risks associated with growth slowdowns.

Analysts say the Korean currency has already slid to a level that can do more harm than good to the entire economy, urging the authorities to do as much as they can to placate the foreign exchange market.

The Korean won has been extending its losing streak against the dollar for months and breached psychological thresholds repeatedly, including the 1,340 level.

It fell 5.7 won and closed at 1,345.5 won on Tuesday to mark the lowest level since April 28, 2009, when it reached 1,356.8 won.

While the 1,340 level marks the lowest point in more than a decade, it is speculated the Korean currency could dip as low as the 1,400 level under the worst scenario.

The 1,400 level was witnessed in Korea only twice ― during the 1997-98 Asian financial crisis and during the 2008-09 global financial crisis.

“It appears there is no breakthrough against the rising dollar at the moment and it is most likely to continue rallying against the Korean currency,” Hi Investment & Securities economist Park Sang-hyun said.

He added he is “open to the local currency reaching 1,400 won,” noting the dollar is at the strongest value it has been in a generation and that devaluation of currencies around the world can further affect the trade-dependent Korean economy.

The affected currencies include euros that have also weakened amid the disrupted supply of Russian gas in a prolonged war in Ukraine and fears of a possible recession.

Regarding the Chinese yuan, slower-than-expected growth and pandemic lockdowns in major cities, including the financial hub of Shanghai and vacation hotspot in Hainan, are raising concerns over the Chinese economy.

The bleak global economic circumstances will dent the purchasing power of Korean exporters' customers.

In turn, Korea will not benefit much from its weakening currency that generally helps enhancing competiveness of exporters, according to Seoul National University economics professor Lee In-ho.

“The won's recent depreciation is rather contributing to surging import prices, which can worsen inflation,” the professor said.

Park Chong-hoon, head of economic research at Standard Chartered Bank Korea, voiced a similar view, saying, “The benefit from devaluation of the Korean won on certain industries will not last long as the global economy is slowing down.”

Shipbuilders are among the businesses that are anticipated to reap huge profits in the third quarter as they write sales contracts in dollars.

In contrast, airlines and steelmakers are paying more dollars to purchase oil and other raw materials needed for operations.

Under the circumstances, Korea, for the first time since 2008, suffered a trade deficit for the fourth consecutive month in July.

The deficit stood at $4.67 billion in July, up from $1.61 billion in May, $2.57 billion in June and $2.48 billion in April, according to the Ministry of Trade, Industry and Energy.

Exports rose 9.4 percent year-on-year to $60.7 billion in July, marking the highest tally for any July since the ministry began compiling the data in 1956.

But imports also jumped 21.8 percent year-on-year to $65.37 billion due to high prices of energy.

Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI), speculated the surging import prices may prompt inflation to drag on longer than expected and eventually hamper growth from reaching the target in the early 2 percent range.

The Ministry of Economy and Finance and the Bank of Korea (BOK) forecast inflation will peak out around October after hitting a nearly 24-year high of 6.3 percent in July.

Consumer prices accelerated by 6 percent or higher for two straight months, also for the first time in nearly 24 years.

Asked about the won-dollar exchange rate that can have more negative than positive influence on the Korean economy, Park at Standard Chartered Bank Korea said, “It already is doing more harm than good.”

He added, “And the worst is yet to come,” noting the U.S. Federal Reserve is still geared toward additional hikes in the benchmark interest rate after delivering a rare 75-basis-point increase for the second consecutive month in July.

The Fed's stance may widen the interest gap between the U.S. and Korea, and contribute to acceleration in foreign capital flight with investors' growing preference for safe haven assets.

The U.S. currently leads Korea up to 0.25 percentage points in terms of base rate.

As a part of efforts to curb outflow of foreign capital, the BOK can possibly deliver a 25-basis-point rate hike in its scheduled monetary policy meeting, Thursday.

The hike, however, would increase the burden on households and businesses struggling with making repayments.

The government vowed management of risks associated with foreign exchange to ensure it will not hurt the country's financial soundness.

It also issued a verbal warning that it will closely monitor whether there are speculative bets in the currency market amid sharp weakening of the local currency.

Lee at the KERI assessed that the warning “is the least the government can do to prevent the weakening of the won.”