[Weekly Review] Won Value Plummets Without Bottom... 6 Consecutive Months of Trade Deficit Crisis

"US Cannot Prevent Exchange Rate Rise If It Takes 'Ultra Step' Next Week"

On the 16th, when the won-dollar exchange rate started to rise, dealers were working in the dealing room of Hana Bank in Euljiro, Seoul. Photo by Mun Ho-nam munonam@

[Asia Economy Sejong=Reporter Kwon Haeyoung] South Korea's trade balance is on the verge of recording a deficit for six consecutive months for the first time in 25 years since the 1997 foreign exchange crisis. As the value of the Korean won continues to plummet, the won-dollar exchange rate is approaching the 1,400 won mark.

◆Concerns over six consecutive months of trade deficits... First time since the 1997 foreign exchange crisis＝According to the Korea Customs Service on the 17th, the trade balance from the 1st to the 10th of this month recorded a deficit of 2.443 billion dollars. Following August, which set a record monthly deficit of 9.47 billion dollars, the deficit has continued from the beginning of this month. If the trade deficit continues from April through this month, it will be the first time in 25 years since the 1997 foreign exchange crisis (January 1995 to May 1997).

As of the 10th of this month, the cumulative trade deficit reached 27.55 billion dollars, raising concerns that the cumulative deficit for this year may surpass 30 billion dollars. The previous record was 20.6 billion dollars in 1996, just before the International Monetary Fund (IMF) foreign exchange crisis. The six-month consecutive trade deficit is due to soaring energy prices such as crude oil and gas, caused by the full-scale international sanctions against Russia following the Russia-Ukraine war. The sharp rise in the won-dollar exchange rate is also pushing up import prices, worsening the trade balance.

The trade balance with China turned to a surplus of 89 million dollars as of the 10th of this month, but both exports (-20.9%) and imports (-24.2%) decreased compared to the same period last year.

◆The Korean won continues to fall helplessly... "Crossing 1,400 won exchange rate is only a matter of time"＝The won-dollar exchange rate closed at 1,388.0 won on the 16th at the Seoul foreign exchange market, down 5.7 won from the previous trading day. As the won's value continues to fall helplessly and the won-dollar exchange rate is on the verge of entering the 1,400 won range, financial market instability is expanding. The periods when the won-dollar exchange rate exceeded 1,400 won were only twice since the Korean government introduced the exchange rate fluctuation system: during the foreign exchange crisis from December 1997 to June 1998, and during the financial crisis from November 2008 to March 2009.

The market largely views that breaking the 1,400 won exchange rate before next week's Federal Open Market Committee (FOMC) meeting is only a matter of time. Yoon Yeosam, a researcher at Meritz Securities, said, "The government’s defensive will to block the psychological threshold of 1,400 won will be in effect, but if the US FOMC raises the policy rate by 1 percentage point or tightens monetary policy further, it will be difficult to stop the exchange rate from rising. Until the direction of US monetary policy changes and the situation in the Eurozone improves due to political issues, the dollar's strength will continue until the end of the year," he predicted.

As the won-dollar exchange rate rises sharply, concerns about import prices are also growing. According to the Bank of Korea on the same day, the import price index (provisional) for last month fell 0.9% compared to the previous month, showing a decline for two consecutive months following July (-2.6%). This was due to the drop in Dubai crude oil prices, which averaged 96.63 dollars per barrel last month. However, since the exchange rate, which directly affects import prices, has risen sharply recently, there is an analysis that the rate of increase may accelerate from this month.

◆Fiscal deficit to be kept within 3% of GDP... Preliminary feasibility study project cost threshold raised from 50 billion to 100 billion won＝The government will introduce a 'fiscal rule' to manage the fiscal deficit ratio relative to gross domestic product (GDP) within 3%. If the national debt exceeds 60% of GDP, the deficit ratio will be capped at 2%. Through this, the government aims to slow the increase in national debt and manage the national debt-to-GDP ratio from the current 50% to the mid-50% range during the current administration's term. In particular, instead of using the integrated fiscal balance (government total revenue minus total expenditure) as the main indicator, the government will use the managed fiscal balance (excluding social security fund balances from the integrated fiscal balance) to manage the national budget more strictly.

However, the fiscal rule will not be applied in crisis situations such as war, disasters, or economic recessions. This is the same as the supplementary budget formation conditions, but concerns have been raised that exceptions to the fiscal rule may occur frequently, given that successive governments have formed supplementary budgets for eight consecutive years since 2015 and have not strictly interpreted the supplementary budget conditions.

Additionally, the government will significantly revise the preliminary feasibility study (PFS) system for the first time in 23 years by doubling the project cost threshold for conducting PFS on new large-scale fiscal projects (from 50 billion won to 100 billion won) while strengthening the exemption criteria.

This content was produced with the assistance of AI translation services.