Oil prices and the won

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Oil prices and the won

International oil prices are plunging again. As of January 13, Brent crude dropped to $30.31 per barrel, its lowest level in 12 years. Dubai crude, which accounts for most of Korea’s petroleum imports, plummeted to $26 from $45 per barrel over the last three months. Market analysts predict the oil price could soon fall to $10 to $15 per barrel. In the meantime, the Korean won declined to 1213.4 won against the dollar, the largest drop in 66 months. The won’s value has already decreased by more than 3 percent this year after a 6 percent fall last year.

In fact, the simultaneous drop in international oil prices and the won was expected after the United States last year made official its raising of its federal funds rate, which led to the weakening of currencies of emerging economies, including Korea’s won. That helped crude oil prices drop further amid oversupply of petroleum to global markets. Yet the pace of the fall at the beginning of the year was much steeper than expected due to the unexpected crash of Chinese stock markets and the weakening yuan.

The People’s Bank of China - the central bank of the People’s Republic of China - lowered the yuan’s value by approximately 1.5 percent since the end of 2015. Chinese stock markets plunged by big margins after interpreting the central bank’s decision as a panicked government policy to stimulate exports. In foreign exchange markets, too, speculative trading was in full swing after investors expected a further decline of the yuan. Though an embarrassed central bank revaluated the yuan from Jan. 8, market jitters didn’t subside. Instead, it ended up stimulating more doubts about Beijing’s capability to calm fluctuations on its market.

We cannot welcome the synchronized decline of oil prices and the won. In the past, if the won’s value dropped, it helped boost our exports and profit margins. A fall in oil prices lowered the costs of our imports and raised households’ real income. In a global recession, however, price competitiveness can hardly boost our exports. Demand will fall. Cheaper petroleum prices force oil-producing countries to spend less on construction projects that Korean firms make money on. The weak won raises the cost of traveling overseas and the tuition costs for the high number of families with kids studying overseas. Also, there are concerns about an outflow of foreign capital. The best example is that foreign investors have sold as much as 1.4 trillion won worth of stocks over the last two weeks.

The days when lower crude prices and a weakening won helped our economy are gone. The government must find ways to mitigate repercussions from an excessive volatility of the won.

JoongAng Ilbo, Jan. 15, Page 30

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