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Exchange Rate Shock Could Send Next Year’s Growth Rate Plummeting

Exchange Rate Shock Could Send Next Year’s Growth Rate Plummeting

Posted November. 28, 2004 23:02,   


Due to the abrupt drop in the exchange rate of Korean currency against the U.S. dollar (an appreciation of the won), expectations that the foreseen economic growth rate for next year will decrease from the initial foreseen rate are coming to the surface.

According to the Bank of Korea’s (BOK) “analysis of the effect of exchange rate decline” data publicized on November 28, assuming that other economic variables remain unchanged, if the value of the won increases one percent by yearly standards, the growth rate of gross domestic product (GDP) will decrease by 0.05 percentage points.

The value of the won has increased by 10.0 percent from October 1 to November 26. If the effect of this drop in the exchange rate continues for a year, owing to such factors as a decrease in exports, the GDP growth rate will drop by 0.5 percentage points.

Economic experts believe if during the deepening of the economic recession the trend of the weak dollar continues, exports will acutely decline and the magnitude of the drop in next year’s economy will become larger.

On this day, JP Morgan estimated that the won-dollar exchange rate for next year’s first quarter (January to March) will drop to 1,000 won, and by the second quarter (April to June) it will drop to 980 won.

Through the Asian economy outlook report, CSFB lowered the won-dollar exchange rate three-month projection to 995 won from it’s initial 1,100 won, and predicted it would bear the largest drop among Asian currencies.

The BOK is planning to announce its expected growth rate for next year in early December. However, due to the current trend of abrupt declines in the exchange rate, it became known that the BOK is adjusting the expected value to a lower amount.

Civilian economic research institutes predict that on account of the decrease in the third quarter (July to September) growth rate to 4.6 percent and the trend of the dropping exchange rate, there is much probability of next year’s growth rate for the first half declining to the three percent zone.

Kim Kyoung-won, executive director of the Samsung Economic Research Institute (SERI), explained, “Due to the completion of demand for the exchange of information technology (IT), next year’s exports were already facing an inevitable slowdown, and as a result of the abrupt drop in the exchange rate, it will suffer further,” and that “because the term of comparison, this year’s first half, had a high growth rate of five percent, the decline in next year’s growth rate is certain.”

Kang-Woon Lee kwoon90@donga.com