Even Exports, the Economic Mainstay, Are Falling

The Organization of Petroleum Exporting Countries (OPEC)’s sudden cut in oil production has sent the international oil price skyrocketing.

From the rising value of the won (declining won exchange rate), the 1,160 won per dollar level is showing signs of falling. With the addition of raw material fluctuations, the Korean economy’s only support, its export competitiveness, is being threatened.

Accordingly, the 5 to 6 percent economic growth rate the government had announced has turned on “red lights,” and is raising concerns that the recession may become prolonged.

The Ministry of Finance and Economy and the Ministry of Commerce, Industry and Energy said yesterday that on February 10, West Texas Intermediate (WTI) was traded at $33.87 per barrel, rising by $0.91 from the day before, with the 34-dollar level just ahead.

Middle Eastern Dubai crude and North Sea Brent oil were trading at $27.65 and $29.86 per barrel, increasing by $0.22 and $0.72 respectively.

This sudden rise in the international oil price resulted from the decision made in the OPEC general meeting held on February 10 in Algeria to cut daily production by one million barrels (2.5 million barrels when including the surplus production of 1.5 billion barrels), overthrowing the market’s forecast of freezing the production quota.

In the case of Korea, where there is a high dependence on foreign countries for its energy source, if the international oil price rises, the high cost will give adverse effects to export and increase imports, burdening the balance of payments.

-The value of won is rising

The exchange rate for the won-dollar in the foreign exchange market yesterday was 1160.60 won, dropping by 1.50 won from the day before. The value of won rose for four consecutive days.

With the concurrent rise in the oil price, and with the won value and raw material prices becoming distinct, export competitiveness shows signs of sharply declining.

According to the Bank of Korea, the average net barter terms of the trade index for January through November of last year was 89.5, dropping to the lowest level in 15 years since 1988. This shows that the payability of export-based enterprises is becoming very aggravated.

Korea Economic Research Institute senior researcher Huh Chan-kuk showed his concern, saying, “At such a time where investments are dwindling and the growth potential has taken a sharp decline, if our export competitiveness is at loss from the increasing oil prices, the economic recovery will be prolonged.”

Ki-Jeong Ko Joong-Hyun Park koh@donga.com sanjuck@donga.com