Here we go again. The won has hit a new low against the dollar, falling to its weakest point in the past 30 months to 1,049.6 won to a dollar, a fact that has to be disconcerting to anyone getting their paychecks in the Korean currency and doing the mental calculation in another currency (i.e. foreigners).
(Graphic from The Korea Times)
The initial explanations center around uncertainty about the South Korean economy and the advance of the U.S. dollar against the Euro. One Bloomberg article cites a “monetary shock” as another reason for the big drop.
However, the other bit of South Korean economic news is the widening current account deficit (”CAD”), which has been in the negative for four consecutive months. As all graduate level economic students will tell you, currency fluctuations and CAD rate are linked, particularly if a country is still viewed by the international financial community as still “developing.”
Korea is simply not selling enough cars, ships, and plasma screen TVs to offset the amount of won flowing out of the country to feed Korea’s appetite for foreign commodities (i.e. Australia and Latin America), capital goods (i.e. Japan), education (the U.S.), investment funds (i.e. Europe), oil (the Middle East), etc. It’s interesting to note that the two components of CAD that Korea has had the most trouble with is Foreign Direct Investment (”FDI”) and tourism. These are two items that foreigners have take their dollars, yen and Euros to convert into won to be active in, which would help balance the CAD. Little wonder why increasing both FDI and tourism is such a hot topic in Korea.
The silver lining? Hyundai cars, Samsung cell phones, LG plasma screen TVs and STX LNG tankers get cheaper overseas and the sale of chaebol products goes up. This would explain why Hyundai’s stocks are doing well. In a sense, keeping the won low is an easier way to grow the economy, which may be the reason why Bank of Korea Governor Lee Seong Tae is all for it. So, expect it to get worse, before it gets better!
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31 Comments
I wonder how big the whole yuhak factor is. I mean, how many Korean people now have a kid “studying” overseas? That’s got to be doing more of a number on the won than tourism is.
what a difference a year makes
It’s certainly a factor. But that’s another hot topic. Improving Korean schools to a point where so many kids don’t have to go to schools overseas. That will certainly help.
An inside tip, the bank manager at my KB branch says the won will be at 1300 by this year.
Won at 1300 will help attract hated foreign investment! Hurray!
Nah… more like make the Sonata cheaper to the average U.S. and European consumer.
It’s politically okay to have foreigners invest in Korea by buying her products, but it’s not politically okay to have those same foreigners buy up Korean companies.
1300#3????? Yuk that’s where it was when we came back in 2002.
What I don’t get is that’s going to cause massive amounts of domestic inflation, why would the government want that? That has to cause a greater outflow of won than Korean tourists do. Or does BOK people don’t have the fears of inflation that the US Fed have?
WangKon936 — At 1300 there are a lot of garbage-pickers looking for “cheap” assets, in particular real estate.
r.rac — Korea has always put the “national interest” ahead of the interests of its people. Inflation doesn’t bother the captains of industry, because they own all the hard assets anyway.
# 7,
True. It’s harder to get angry at small, bargin hunting foreign investors then it is to get butt mad at big foreign investors (i.e. Lone Star) buying up higher profile Korean companies (i.e. Korea Exchange Bank).
Thanks, Wangkon for your very useful analysis. I wonder if my annual salary will go down another $6,000Cdn this year?
Set my salary in dollaz 1.5 years ago, and saw it erode against the won every month when I was paid. Glad to see the tide turning again. I’m hoping for that 1300.
I’m hoping for 1,500+
The won will be 1200 to 1300 to a dollar by year’s end.
Also, oil will be $80 a barrel by year’s end. You heard it here first.
T_T
Ok, Brendan, given that a current account deficit over the short run isn’t that bad, especially given Korea’s forex reserves, why is the govt so obsessed with keeping it in the black?
They’ve got to know that right now in the US nobody is buying much given consumer spending reports and no matter how cheap Korean exports are, Americans won’t buy more Korean stuff because it is cheap. Do they expect a cheap won vs the euro to drive up exports there to make this up? I don’t see this either given the credit crunch.
Wow, so now he have bank managers that are foreign exchange experts. If the guy was sooo good at predicting exchange rates, he would’nt be a bank manager.
The really incredible thing is that due to the carry trades, hi yielding currencies such as the Aussie and New Zealand dollars have been appreciating.
Korea also is a high yielding currency, but it’s depreciating. Says a lot doesn’t it!
Then again what do I know I’m not a Bank Manager!
# 16,
That depends. If the bank manager is talking out of his ass, then I’d pay him no heed. However, if said bank manager has got a internal report from the bank’s chief economist on his desk and basing his opinion on that, then his thoughts have more weight to it.
“Americans won’t buy more Korean stuff because it is cheap.”
Yes they will.
In an economic downturn (not a recession, the U.S. is not in a recession, even though it may feel like it to some) consumer consumption does not end, it shifts. People tend to buy substitutes, you know, not the brand name dish washing liquid, but the store brand. Same with cars. People don’t stop buying cars, they just buy cheaper cars or used cars.
Korean cars in the U.S. are still seen as a cheaper substitute to Japanese cars and budget European cars.
Also, there is positive news on the retail front in the U.S.:
http://www.cnbc.com/id/24524583
Which would reinforce my opinion that people don’t STOP spending in economic slowdowns, they just buy cheaper stuff. Do not underestimate the American propensity to consume my friend, particularly since it is pretty much the driving force behind the world economy.
Korean exports are up 27% year-on-year. That’s ginormous, and is fueled by cheap won.
However, value of imports gained 28% because of rising commodity prices and, ahem, the cheap won…
If the Fed has to tighten (as I recall “price stability” is somewhere in the fine print of it’s mandate) rather than the European Central Bank cutting (one side’s got to give…) then we could get to that 1200 or 1300 won per dollar. But it should be stressed that *nobody knows*–not the bank branch manager (certainly not them) or even the central bank’s manager…
Of course we don’t know for sure if the won will be at 1,300 within this year. All opinions range from hearsay to educated “gut” guesses.
But my educated “gut” guess is that there is downward pressure on the won. The BOK won’t do a lot about it other then perhaps monitor it so it doesn’t go into free fall. Once it hits around 1,200, it becomes a deteriment because then inflation will start to put a damper on the economy. However, there is a feeling in commodity markets that certain commodities such as oil and food stuffs, are too high and will decline in price. If commodity prices decline in the 3rd quarter, the BOK will have more leway to allow the won to deflate further. However, once Korean products reach a certain price and demand point, the CAD should stablize and swing back into the positive because Korean products will be in greater demand overseas.
Thus, in my opinion, how much the BOK allows the won to deflate will depend heavily on commodity prices.
Kids studying overseas is irrelevant. The return on education is enormous and it’ll pay itself off in no time. There might be a bump in the deficit because of it, but in the long run its a benefit especially when these kids are graduating from Ivy league schools.
Economists are notoriously wrong when it comes to predictions. How many economists are hot shot commodity traders or fund managers? Definition of an economist…., someone who tells you tommorow, why what they said yesterday, DID’NT happen today!
I don’t underestimate the American consumer’s desire or willingness to consume, WangKon. I do wonder at this point, though, how it is that further consumption will be paid for. Aren’t the West’s consumers about tapped out? Aren’t we at a point where spending has to come from either governments or Asian consumers?
The formula to success is not:
FDI : LoneStar-style persecution
Tourism : More golf courses
it’s rather:
chaebol protection : LoneStar-style persecution
chaebol executives : More golf courses
Korea has the best politicians money can buy (and Korea is not unique by a long shot).
I have a feeling that the ROK govt is engineering won weakness to 1) boost the country’s exports and 2) along w/ japan help support an ailing US dollar
w/ LMB as president, is this really that farfetched?
# 20 WangKon936
If you were to ask Lee, Seong-tae a question or two what would you ask?
@25, I wouldn’t call it engineering. What they are banking on is that in the very near future the price of oil and some commodities will drop. Oil especially is expected to drop and the dollar is expected to recover slightly.
if it takes a graduate level student rather than just an undergrad student to tell that exchange rates and the current account are linked then Koreans aren’t getting much for all these education dollars.
# 25,
Bingo Boston_Rob.
“Engineering won weakness”, as Boston Rob calls it, is doable, and the reason would be export support, yes. (The support for the US dollar now comes from the GCC (Persian Gulf Coast Countries) and China, though. Japan and Korea have been left behind by the scale of purchases by these other two major buyers of US bonds.)
So, Korea can expand its money supply enough to engineer won weakness. All this means is that the exporters get more won per export dollar, and so can keep Koreans working. That’s a good thing. But those same workers are going to pay for it, because the price of won weakness is domestic inflation.
You don’t get something for nothing.
That said, I just checked the BOK’s site, and the growth in money supply is indeed accelerating. But my amateur assumption is that the sudden switch to a negative trade balance in 2008 had more to do with the won’s sudden slide.
Hey Linkd,
Sorry for not replying to you earlier. Took me a while to come back to this posting as it’s gotten a bit buried. As I’ve told you before, if you have specific questions for me, get a hold of me through my xanga.
I don’t think the BOK needs to manipulate the money supply too much because the won has already got downward pressure as it is. In my opinion, central bank intervention into defense of the currency hinges on what commodity prices do. If they go down like the BOK and even the U.S. Federal Reserve think they will, then the BOK will let the won fall against the dollar.
Food futures are overpriced and will fall. Oil supply is increasing and oil futures should fall also (although long term oil prices will have upward pressure, but as it is $126 a barrel is too high right now).
So if commodity prices fall, then inflationary pressures will be eased, then deflating the won makes sense in 1) balancing out CAB by increasing trade and 2) increasing economic growth to relieve political pressure on LMB for his silly “747″ plan of 7% economic growth.
Lastly, a cheaper won also solves another problem, which is the lack of liquidity in financing markets in Korea. This is why the BOK has been so reluctant to cut interest rates. The last thing Korea needs are people borrowing more, because the central bank doesn’t have much more money to lend out. If borrowing in Korea increases, the money has to come from somewhere and where ever it comes from, it’s likely to affect Korea’s CAB and foreign currency reserves negatively. This is another reason why FDI is so important (insert Brendon Carr “I told you so” sarcastic comment here). There are clearly risks to foreign firms to put money into Korea. However, if the won deflates 20 or 30% and foreign investment firms see that as a temporary and opportunistic situation, they will take more of a “damn the torpedoes” attitude and take the plunge any ways. Investment growth coupled with currency arbitrage equals fat IRRs and happy limited partners.