The South Korean won is underperforming most other currencies as Asia’s fourth-largest economy is gradually losing steam for long-term growth.
The won has lost 5.4% against the dollar so far this year as of Monday, according to South Korea’s central bank data, although the US currency declined overall on expectations that the Federal Reserve is likely to end its tightening campaign soon. The dollar index, which tracks the currency’s value against a basket of six major counterparts such as the euro, skidded about 1%.
The South Korean unit depreciated more than its peers in Asia with the Japanese yen down 2.3%.
Last year, the won shed 6% as it hit 1,444.2 per dollar, the weakest since the 2008-09 global financial crisis, pressured by the Fed’s aggressive interest rate hikes to stem the rampant inflation.
That indicated the won became structurally weak as the currency is usually stronger than 1,300, except when the economy faced crunches such as the 1997-98 Asian financial crisis.
The country was set to suffer a trade deficit for 15 months in a row while already reporting a fiscal deficit of 54 trillion won ($450.4 billion) in the first quarter.
External conditions remained tough given the ongoing troubles facing US regional banks after the collapse of Silicon Valley Bank. The problems in the sector are unlikely to result in a global crisis similar to that of Lehman Brothers, but all economic subjects remain concerned over a potential meltdown.
The South Korean economy is also losing growth potential. Despite the record-low fertility and quickly aging population, the country has yet to take measures to quickly change the entire social system to address the problems.
CURRENCY INTERVENTION WILL NOT WORK
Yong-Seok Ju is the economic desk editor at The Korea Economic Daily
All of those issues put pressure on the won to weaken past the 1,300 level. The foreign exchange was spotted intervening to prop up the South Korean unit, but it did not work much, given the structurally weakening fundamentals. It is neither possible nor desirable to artificially support the currency.
The country must stably manage the macroeconomy in the short term while improving its economic constitution in the long term for fundamental solutions.
The government needs to increase export competitiveness, ease regulations, which hinder investments, and upgrade the economic system to cope with the low birth rate and aging issues through the reforms of labor, pension and education systems.
South Korea successfully recovered from two crises in 1997-98 and 2008-09, which were short-term shocks.
The country has yet to suffer financial market turmoil, which it experienced during the past crises, but the recent won’s weakness could be a deadly alarm, warning of gradual deterioration in its economic fundamentals.
