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Korea must act as won plummets

Published: 07 Sep. 2022, 20:01

The Korean economy is headed to a complex crisis as the won’s value drops further and the trade deficit grows. The dollar was traded at as high as 1,388.40 won in the foreign exchange market on Wednesday. The Korean won has fallen by a whopping 28 percent from 1,080 won per dollar in January. Local companies are screaming after prices of energy and raw materials soared in the wake of the Ukraine war.

According to the balance of payments for July announced by the government on Wednesday, the goods balance turned to a $1.18 billion deficit, the first of its kind since April 2014. The Bank of Korea (BOK) attributed it to increased import prices from soaring international energy prices and to a dramatic reduction in Korea’s exports to China due to an economic slowdown in the country.

But the problem is that such hostile conditions cannot be resolved in a short period of time. A rapid rise in energy and commodity prices primarily originates with the deepening imbalance in global trade from Russia’s invasion of Ukraine. But Russia’s President Vladimir Putin is shutting its gas supplies to Europe harder than before in retaliation for international sanctions on Russia for the aggression. Soaring energy prices and the worsening goods balance that Korea faces are the results. In the meantime, Korea’s trade with China were $9.47 billion in deficit in August, the largest since 1956, when the government started to collect trade data.

A bigger problem is a synchronized plunge of the currencies of Japan and China, Korea’s trade rivals. The value of the yen fell to the level of 142 yen per dollar on Wednesday, which was a steeper drop than the won. The yen has fallen a whopping 42 percent since January 2021. The yuan is no exception. Such developments contradict the relative optimism demonstrated by BOK Gov. Rhee Chang-yong in a press conference earlier.

But our most serious concern is the likelihood of the Korean won plummeting to the level of 1,500 won per dollar in the near future. Since the U.S. Federal Reserve is poised to lift its benchmark rate to 3.4 percent by the end of this year, global financial markets will certainly continue their convulsions. Even if the Bank of Korea embarks on additional rate hikes, Korea cannot but suffer as long as the rate gap between Korea and the U.S. is widened. Such circumstances will help accelerate the plunge of the Korean won.

The government must not sit on its hands after blaming it on external conditions. It must roll up its sleeves to prevent a further deterioration of Korea’s trade balance by using all possible means. The government must not forget that if it leaves the situation unattended, it could trigger another foreign exchange crisis.