Alarming fluctuations

In an alarming turn, the Korean won’s value has dropped nearly 10 percent since the beginning of the year — a whopping 9 percent drop against the U.S. dollar and a 13 percent fall against the Japanese yen. That’s the steepest plunge among currencies of the Group of 20 economies except Argentina. The government tried to appease deepening concerns in the markets, pointing to “our $403 billion in foreign currency reserves and strong economic fundamentals.” Yet that failed to instill confidence as seen in people’s stampede to deposit their money in dollars and buy gold, which reflects growing expectations for a further tumble in the won in the near future.
There are five reasons for the dive of our currency.

First, bad external conditions: the combination of the Korea-Japan conflicts over historical issues and the Sino-U.S. trade war, above all. After Washington designated China a manipulator of exchange rates, the World Trade Organization (WTO) forecast that Korea’s gross domestic product will shrink by 3.3 percent in 2022 — the steepest decline after the Association of Southeast Asian nations — unless the trade wars end. After an economy is damaged, the value of its currency falls.

Second, more dollars are fleeing Korea than coming in. In the first half of the year, the surplus in our current account balance shrank to the lowest level since 2012. Companies increasingly relocate to other countries in search of a deregulation haven, while foreign companies’ investment in Korea has nearly halved in just a year. Individual investors are increasingly shunning unattractive Korean stocks and bonds to put their money in foreign stocks and bonds.

Third, the government’s apparatus to safeguard our financial integrity is not sufficiently reassuring the public. Korean stocks and bonds owned by foreign investors amount to $560 billion — a whopping $157 billion more than the government’s foreign reserves of $403 billion. Foreigners could sell their stocks and bonds any time they want. The loans Korean companies borrowed from foreign companies — the total amount of which is yet to be disclosed — can be another trigger.

Fourth, the government’s capability to address the dangerous fluctuations in our currency in a macroeconomic way is quite limited due to its 38.5 trillion won ($31.7 billion) deficit in the first half of the year.

Fifth, people aren’t sure of the Korean won’s ability to rebound. A fall in a currency’s value usually helps bolster exports and increases dollar revenues, which helps a currency restore its value. Korea experienced this during and after the 2008 financial crisis. But the situation is different this time due to Chinese products’ stronger competitiveness.

If the won’s value plummets, prices soar, which can lead to stagflation. The government must transform Korea into an attractive destination for foreign investment by removing all stifling regulations and scrapping its anti-corporate and pro-labor policies. That will help both our exports and jobs increase with increased investment from foreigners.

The government has no time to lose. It must come up with detailed action plan to stabilize our fluctuating currency. If the government sticks to its mantra that our economic fundamentals are still strong, it will never regain trust from the markets.

JoongAng Ilbo, Aug. 9, Page 30