Preparing for the strong won

Kim Kwang-ki
*The author, head of the Economic Research Institute for the JoongAng Ilbo, is an editorial writer.

In October 2007, when South Korean President Roh Moo-hyun was to hold the second inter-Korean summit meeting with North Korea’s Kim Jong-il, domestic eyes were mindful of the exchange rate. The Korean won hit 900.7 against the U.S. dollar. The exchange rate averaged at 929 won that year. The won that had crashed to 1,995 against the dollar in 1998 following the financial crisis in late 1997 appreciated to above the 900 level in 2006-2007.

A stronger domestic currency enriched Koreans and raised their purchasing power. Prices of gasoline and other imports became cheap, and Koreans were more able to go abroad and spend. But exporters struggled. Inexperienced small and mid-sized merchants, in particular, were distressed after rushing to subscribe to novel foreign exchange hedging instruments. Still, exports rose by 14 percent in 2007 against the previous year, generating a surplus of $11.8 billion in the current account balance.

The exchange rate underwent another swing in 2008 after the launch of the conservative government of President Lee Myung-bak. Chilled inter-Korean relations under the hard-line conservative government, coupled with the Wall Street-triggered global financial meltdown, sent the won to as low as 1,500 against the greenback. Seoul authorities struggled to aid the economy and spent 2 trillion won ($1.85 billion) to 3 trillion won annually to depreciate the won in support of exporters.

A currency’s value is a comprehensive scoreboard for an economy. It not only reflects the current account balance and growth rate, but also future risks and potential for the economy. Most economists agree that the Korean won’s exchange rate is devalued against other major currencies, given the current economic data available. What weighs it down most is the geopolitical risk from the North Korea threat.

A watershed moment has arrived with today’s summit meeting between South Korean President Moon Jae-in and North Korean leader Kim Jong-un, to be followed by talks between U.S. President Donald Trump and Kim. If the meetings end disappointingly, the dollar currently hovering at 1,080 won will likely recover to the level of 1,100 won to 1,200 won. But if they lead to a permanent peace settlement, the local currency will reach an entirely different level. The won could climb up to over 900 won for the first time in a decade.

Lasting peace on the peninsula would not only remove the ticking bomb that is North Korea, but also put the South Korean economy on a completely new platform. Joint-ventures similar to the currently idle Kaesong Industrial Complex would mushroom, offering new opportunities for small and mid-size enterprises. The domestic market currently serving a population of 50 million in the South would be expanded to 80 million.

Thanks to its geographical merits, the Korean Peninsula will emerge as the gateway to the vast Eurasian continent. Global capital as well human and infrastructure resources will pour in through the liberalization of North Korea that could open up the land and seas. South Korea will be resourceful to aid foreign ventures in North Korea.

It may take a long time before real money comes in. But since the exchange rate moves preemptively, we should be prepared. The government must nurture innovative capabilities to hone enterprise productivity and lift regulatory barriers so that Korea Inc. could go on with business with lesser worries about the foreign exchange rate movement.

Seoul authorities no longer can outright intervene in the currency market as the country is on the U.S. monitoring list for currency manipulation. Therefore, they must find a balanced way to prevent heavy fluctuations in the exchange rate. At the same time, they must share useful tips for small and mid-size traders on ways to hedge better against exchange rate risks.

As in the past, a stronger currency can boost purchasing power and domestic demand. More people also could be tempted to spend more overseas than at home. But the risks could be minimized if the government and business community work harder to stimulate domestic demand in the era of a strong won.

A strong currency should not be considered a curse but a blessing in the age of peace. We must welcome such a new age with confidence that we would have more to gain than to lose.

JoongAng Ilbo, April 26, Page 32