Worries about the wonThe Korean won’s value is plunging too rapidly. A 10.3 won drop per dollar yesterday has pushed it through the 1,200 won per dollar level, the lowest value since July 2010. The alarming drop in the won’s value stems partly from the prospect of an increased demand for dollars after Tesco, a British multinational retailer, announced a plan Monday to sell off Homeplus, the second-largest retailer in South Korea, to help repair its worsening financial condition. Another reason for the won’s fall is an exodus of investors after the announcement.
But uncertainty in the global economy played a bigger part in lowering the value of the won, which is highly dependent on China. Coupled with the trauma of a foreign exchange crisis nearly two decades ago, the Korean won is paying the highest price among other currencies ahead of the Fed’s raising of its benchmark lending rate as early as next week.
A precipitous fall in the value of the won does more harm than good. A drop in the won once translated into an export boost, but that does not work anymore as global trade volume is rapidly shrinking due to China’s slowdown. The Financial Times recently ran the results of research showing that a 1 percent drop in emerging economies’ currencies does not boost their exports; instead, it leads to a 0.5 percent reduction of their imports. Governments’ foreign exchange policies can hardly contribute to an increase in trade volume anymore.
Emerging economies’ financial markets are extremely vulnerable to outside shocks. Korea experienced that at the time of China’s stock market crash last month. The won’s value plummeted by 2.29 percent (27.6 won against the dollar) for two days in a row followed by the drop of the Kospi index below 2,000. That marked the steepest fall among major currencies of the world after the yuan. We also saw a massive exodus of foreign capital from our financial markets. That laid bare the vulnerability of the won.
Ahead of the upcoming lifting of interest rates by the Fed, calculations for our economy get more complicated. Korea is the only country whose capital market is totally open among major currencies. As a result, whenever major global currencies fluctuate, our stock market serves as an ATM for foreign investors. For how long should we tolerate such a situation? We must first get rid of a sense of powerlessness. Also, the government must lower our economy’s overwhelming reliance on the dollar and make preparations for the globalization of the won. We also must carefully review our old policies of lowering the won’s value to recover the price competitiveness of our exports temporarily.
JoongAng Ilbo, Sept. 8, Page 34