High Speed of Strong Korean Won Threatens the Korean Exports

A strong movement of appreciation of won currency has been serious recently.

After the second half of last year, the Korean economy has various unfavorable factors such as a depression of domestic market, increase of the international oil price, decline of an investment psychology and a nuclear issue of the North Korea. In such a situation, the appreciation of won currency becomes a critical variable which depresses the Korean economy.

In this relation, some foreign press such as Bloomberg warned, the greatest unfavorable factor of the Asian economy is an aggravation of the export competitiveness of Asian countries based on the weak dollar.”

▽Very high speed of appreciation of won currency = On January 10, in the foreign exchange market of Seoul, the rate of won-dollar was 1,178.7 won per dollar decreased by 0.1 won over last day. On January 9, the rate of won currency dropped below 1,180 won per dollar of ‘psychological support line’ for the first time in five months after July 25, 2002.

After the rate of won currency rose suddenly to 1,332 won per dollar last April, the rise and fall repeated and the speed of the decrease is faster. The recent exchange rate decreased by 6% over two to three months ago.

The analysis said that there were two reasons for a weak trend of dollar against the won currency and Japanese yen. It is because the US political situations such as a possibility of US-Iraq war and the nuclear problem of the North Korea are very uncertain, and a recovery of US business has been delayed beyond the expectation.

Domestic and foreign experts are worried about the movement of the recent foreign exchange market. However, there are various different opinions for the future movement.

Bae Yang-geun, researcher of Korea Economic Research Institute(KERI) forecasted, “This year, the speed of appreciation of won currency is so high. The exchange rate can be recovered to 1,180 won per dollar, but the base of the weak trend of dollar will be continued for a while.”

The economic analyst of Bloomberg forecasted, “It is essential that countries of the Southeast Asia must prevent the weak trend of the dollar. Accordingly, the Korean government will use all reasonable efforts to prevent the weak tendency of the dollar, but will not be able to attain an effectiveness.”

Besides, Yun Yeo-gwun, vice-chief of the foreign funds, MOFE analyzed, “Because the US fundamental is better than the Japanese economy, when an uncertainty of its economy such as Iraq war or the nuclear problem of the North Korea disappears, the dollar is likely to be returned to the strong tendency..

▽Biggest shock to small & medium sized companies which have competed with China = The division hit by the decreasing exchange rate is the exports. It is because the price competitiveness lowers in the foreign market. The payability gets worse in the domestic companies. Because they have to increase the exports price in dollars to conform to the payability, the competitiveness goes on declining.

There are more serious damages in the small & medium-sized companies, not the large company. Especially, the small & medium-sized exporting companies, which have been in a severe competition with China in the foreign market such as US and Europe, are worried about the strong Korean won –weak dollar. China has adopted a fixed exchange rate system unlike Korea or Japan.

A manager of the foreign business department of ‘Y’ company which has exported diaries to US and Europe was worried, “When an exchange rate continues to decrease as the contract was made on a basis of US dollar last year, a profitability gets worse considerably. We cannot help losing in a price competition with China and Southeast Asia in the future.”

Park Jin-dal, team leader of KITA said, “As a result of an investigation for corporate members, 1,250 won per dollar was a break-even point. The recent exchange rate is a level of grave concern.”

The large companies will be influenced as well, but their circumstances are a bit better. Among large company such as Samsung and LG, there is a conservative prospect’ which the exchange rate per dollar is low to an annual average 1,150 won. So, many companies made the business plan based on it for the year. The competitiveness of the large company’s core exporting items is influenced by non-price factors such as a fashion and function.

However, Ku Kyo-hyeong, executive director of the strategy planning department, Samsung Corporation said, “It is hard to make a decision because of non-economic variables and serious fluctuation of the exchange rate.”

▽A Movement of the Korean Government = The ministry of finance & economy(MOFE) said that there was no reason why the exchange rate suddenly declined as the recent exchange rate continues to decrease. However, the government will not take any definite measure such as a direct intervention of the foreign exchange market or an issuance of foreign exchange stabilization bond.

Cho Seong-ik, director-general of the international finance division, MOFE said, “We consider that a favorable turn of exports is continuous in the exchange rate of the present level. So, we will not change any macroeconomic index such as a balance of current account. However, when the rate has declined continuously, we have to watch for it because of spillover effects.”

Kwang-Hyun Kim kkh@donga.com