Researchers raise flag over ever-stronger won

Researchers have expressed concern that the ongoing strengthening of the won could depress Korea’s economic growth rate by as much as 0.2 percentage point if the exchange rate reaches 1,000 won ($0.97) to the dollar in the last three months of this year.

A study released yesterday by the Korea Economic Research Institute cited reduced exports as the biggest potential culprit, despite an expected boost in domestic consumption.

The institute used a macroeconomic simulation model to predict that the strengthening of won by the end of the year would reduce prices of imported raw materials and consumer goods in local markets, boosting private consumption by about 0.31 percentage point, as well as increasing capital investment about 0.3 percentage point.

However, increased domestic spending would not be a significant economic factor, be cause it would also increase imports by about 0.2 percentage point.

In addition, Korean exports of goods and services are expected to contract about 0.5 percentage point due to the strong won.

The won has strengthened largely thanks to the continuous inflow of dollars into Korean market, according to the institute. Korea has recorded trade surpluses since 2009 to reach a record surplus of $4.5 billion in April.

Foreign investors also have resumed buying into the Korean stock market since the U.S. Federal Reserve began tapering its stimulus program. Last month alone, foreigners bought local shares worth 2.8 trillion won.

The institute advised the government to take a more aggressive approach to control the exchange rate because further strengthening of the won is expected in future months as the Federal Reserve recently expressed worries about major U.S. economic indicators.

“The government should not ditch a lukewarm attitude that the strengthening won will benefit the local economy,” said the report. “Instead, the government should start taking an active approach to stabilize the exchange rate through vitalizing the domestic economy.”

It explained that the large trade surpluses of recent years are actually a result of weakness in the local economy, not the success of exports.

According to the institute, Korea recorded an annual trade surplus of $79.9 billion last year. Private consumption increased only 2 percent, while imports fell 3.2 percent and investments 1.5 percent.

In a bid to reinvigorate the local economy, the study said the government should keep the benchmark interest rate at 2.5 percent and policies intended to deregulate the real estate market, encouraging the flow of money.

The Federation of Korean Industries also issued a statement concerning its worries about the strengthening won.

According to the federation’s survey of 120 export manufacturers, the companies expect to start seeing less operating profit when the exchange rate drops below 1,052.3 won per dollar.

The companies anticipate an operating profit decline of 0.8 percentage point for every 10 perccent the exchange rate drops below the break-even point.

BY KIM JI-YOON [jiyoon.kim@joongang.co.kr]