Seoul Moving to Abandon Weak Won Policy
By Lee Hyo-sik
Staff Reporter
The won is projected to remain volatile against the dollar for the foreseeable future on a host of internal and external variables, creating an unfavorable environment for businesses engaging in international trade, analysts said Tuesday.
The unstable won-dollar rate will also give Korean parents whose children study abroad a harder time due to the overseas remittance necessary.
Analysts expect the local currency to gain some ground against the greenback in the second half of the year, falling even below 1,000-won level, as the current account balance improves on rising exports toward the year's end.
The Korean government's possible move to prop up the won's value to lower the import costs of crude oil and other raw materials will also put further downward pressure on the won-dollar rate.
But they say the local currency will remain weak against the greenback in the long run if the won-dollar rate is left to the market as Korea will likely have to spend more dollars to bring in raw materials amid rising prices for years to come, while earning fewer dollars from outside on slowing exports as a result of the global economic slowdown.
Since the beginning of the year, the won has weakened against the dollar in line with the nation's ballooning current account deficit as a result of soaring import costs of crude oil. Although the current account balance posted a $1 billion surplus in May, it had been in the red for the five consecutive months from December last year until April. This month, the current account is widely expected to record a deficit as outbound shipments hit a snag because of the truckers' strike.
The Ministry of Strategy and Finance projects that this year's current account deficit will reach $10 billion this year on deteriorating trade terms amid skyrocketing international raw material costs and the high services account shortfall.
Lim Ji-won, vice president and senior economist at JPMorgan Korea, said the won-dollar rate will remain volatile for a while, affected by U.S. Federal Reserves' interest rate decision, the Korean government's possible intervention and the current account balance.
``The U.S. Central Bank had aggressively cut the interest rate in the past to ease the financial market turmoil, following the subprime mortgage defaults last summer. But now it is considering hiking the rate to cope with surging inflationary pressure caused by high crude oil and food prices,'' Lim said. She said if the bank raises the rate, it will make the dollar stronger and put downward pressure on the won.
``If the Korean government sells dollars, it will prop up the won's value to ease inflationary pressure. But if the country's current account balance worsens, it will create a dollar shortage here and weaken the local currency. These three variables will determine the won's future course,'' Lim stressed.
Chang Jae-chul, a senior economist at the Samsung Economic Research Institute (SERI), also echoed Lim's view, saying the won-dollar rate will remain unstable for the time being. ``But in the short term, the won will likely strengthen against the greenback as there will be greater liquidity in the global financial market in the latter half of the year as market conditions improve. Also, the current account balance will likely improve in the coming months as outbound shipments tend to increase toward the year's end,'' Chang said. He projected the won-dollar rate will fall as low as 980 to the dollar.
Lim also forecast that the won will gain some ground against the greenback in the second half, citing the improving international financial market conditions and the Korean government's intervention to boost the won's value. She said the won-dollar rate will range from 1,000 won to 1,040 won.
However, she projected that the local currency will further depreciate against the greenback over the longer term as Korea brings in fewer dollars amid the global economic slowdown and spends more dollars to import oil, aggravating its current account balance.
But Chang differed with Lim on the won's long-term outlook, saying the won-dollar rate will range from 980 won to 1,000 won.
``Korea's current account reaches a balance at the won-dollar rate of 1,000 won and the local currency is undervalued at the moment. I think the government will intervene to prop up the won's value to keep consumer price growth under its target of 3.5 percent this year,'' he said. Chang also noted that the Bank of Korea's conservative monetary policy aimed at curbing rises in consumer prices will help the won hold ground against the greenback.
The government recently abandoned its weak won policy under mounting criticism that the falling local currency has increased the already high prices of imported commodities, putting heavier financial burdens on businesses and households. The policy was designed to keep the won's value low to help boost outbound shipments and improve the current account balance.
Strategy and Finance Minister Kang Man-soo and other senior ministry officials had said the government will tolerate the depreciation of the won against the dollar and may intervene in the foreign currency market, if necessary, to keep the won's value low. They also put pressure on the central bank to cut the key interest rate in a bid to lower borrowing costs and help the won depreciate further.
But Instead of boosting exports and improving the current account balance, the weak won policy has instead increased consumer prices, reduced private consumption, aggravated business performance and dampened job creation.
Consumer prices rose 4.9 percent in May from a year earlier, the highest since June 2001 when prices jumped 5 percent, putting a heavier financial burden on businesses and households here. It is well above the Bank of Korea's target range of 2.5 percent to 3.5 percent and the government's 3.3 percent.
Against this backdrop, the government abandoned its weak won policy a few weeks ago and even sold $4 billion in the local currency market early this month to boost the won's value.
Chang said to stabilize the won-dollar rate, the government should send signals to the market in a coherent manner, adding it would be most appropriate for the won to be traded at 1,000 won against the dollar to maintain sustainable outbound shipments and mitigate the fallout from high oil prices.