[Opinion] Perspectives on the Korean Economy Focused on High Exchange Rates

Unstable Economic Trends Amid Impeachment Crisis
"Korean Economy Operates Well Systemically"
Effective Communication at Home and Abroad Is the Only Way

The worries of the "gireogi" dads have grown. Overseas investors, sensitive to exchange rates, are persistently selling Korean stocks. The exchange rate is a measure of a country's economy. We are facing an exchange rate in the 1480 won range, as seen during the foreign exchange crisis and the global financial crisis. Our economic environment is not favorable, so let's analyze the causes.

First, the trend of the US Dollar Index. The Dollar Index is an indicator that shows the average value of the US dollar against the currencies of six major countries worldwide. When the Dollar Index rises, the won-dollar exchange rate rises. In the "King Dollar" era of September to October 2022, when the Dollar Index recorded 113-114, the won-dollar exchange rate was just under 1450 won. The fact that the exchange rate reached 1480 won with the Dollar Index at around 108 reflects the uncertainties in our economy, such as martial law and the impeachment of the acting president.

Second, the US third-quarter economic growth rate (annualized) recorded a high growth rate of 3.1%. In contrast, this year, our economic growth rate is projected to be 2.0-2.2%. Since the US economy, which is more than 15 times the size of ours, has a higher growth rate than ours, the won-dollar exchange rate rises. The low growth rates of other countries such as Europe and China also contribute to the strong dollar phenomenon.

Third, the export growth rate peaked in July and has been declining every month since. Recently, US memory semiconductor company Micron Technology stated that its guidance for the next quarter would fall short of market expectations. There is little room to rely on semiconductor exports, which have been a pillar of our economy. Both exports and domestic demand are struggling, and since next year's economic growth rate is expected to be worse than this year's, the won-dollar exchange rate is unlikely to improve.

Fourth, the interest rate differential between Korea and the US is also a problem. Although the US cut interest rates by 1 percentage point this year, it is expected to be difficult to maintain the same rate-cutting stance in 2025. At most, there may be two cuts, and if inflation rises due to the new government's policies, the outlook is uncertain. Possibly due to the Federal Reserve's (Fed) hawkish shift by reducing the number of rate cuts next year, the US long-term government bond yield rose to 4.6%. In Korea, the domestic economy is weak, and multiple additional rate cuts are expected next year. Korea's base interest rate (3.0%) is lower than the European Central Bank's (ECB) base rate (3.25%), which has cut rates three times in a row. The Bank of Japan, worried about inflation rising more than in the US, is likely to postpone additional rate hikes until March. The possibility of yen carry trade liquidation in January due to yen appreciation does not seem significant at the moment. Typically, Japan's rate hikes lead to a decline in the won-dollar exchange rate.

Since the emergency martial law declaration on December 3rd (1402.9 won), the exchange rate has risen by about 80 won. What about previous cases? During the impeachment of former President Park Geun-hye, the exchange rate, which was in the 1160 won range, jumped to the 1200 won range after the National Assembly passed the impeachment motion, then quickly fell back to the 1100 won range. During former President Roh's impeachment crisis, the exchange rate rose to the 1180 won range before and after the Constitutional Court dismissed the impeachment motion, then gradually stabilized. The current international economic environment is not favorable to Korea. As the Fed adjusts the pace of rate cuts, the dollar value is likely to remain high in the medium to long term. This means the won-dollar exchange rate may not easily fall in the future. This is a point where intense debate over the "exchange rate" and "economic" trends is expected within the Bank of Korea. Measures such as supporting the extension of corporate foreign currency loan maturities, raising limits on financial institutions' forward foreign exchange positions, and easing restrictions on the use of foreign currency loans must proceed without delay. For the time being, fiscal policy is more important than monetary policy to stimulate the economy. We must not jeopardize Korea's external credibility, and the only way is to demonstrate that our economy is operating well systemically.

Jo Won-kyung, Professor at UNIST and Director of the Global Industry-Academia Cooperation Center

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