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Export industry hardest-hit, as high prices on int’l market refuse to budge
After recent movement in the foreign exchange rate, it would seem that economic textbooks could use a good dose of revision. For despite the plethora of factors that would seem likely to weaken the won, including a slowdown of the economy, an increase in the deficit of the balance in current accounts, and the North Korean nuclear test, the exchange rate has not slipped. In fact, a debate is taking place between the industrial and financial sectors over who is responsible for the strong won, which is commonly regarded as a source of great distress for the economy, as it keeps prices of Korean exports high on the international market. The conditions of the currency market would seem to suggest that a weakening of the won is only natural. Though there is a significant possibility that the balance of current accounts will rebound in the second half of this year, there was a net deficit of $1.3 billion recorded this year until August. What is more, foreign investors have sold off a net sum of $12 billion worth of shares in the Korean stock market since May. Finally, Korean investors’ stake in assets abroad totals $17 billion. According to the textbook, such a large sum of dollars being sent abroad would serve to pull the won’s value downwards. Even long-term factors would tend to point towards a devaluing of the currency. Amidst such uncertainty, economic forecasts are no less tentative than the prospects of the passage of an economic stimulus package in the upcoming year. Though the economy quickly overcame the moment of crisis immediately following the North Korean nuclear test, forces threatening a lowering of the national credit rating remain present. Despite these dynamics, the currency exchange rate is defying conventional expectations. In October of 2004, the won’s value rose, reaching a value of 1,100 won to the dollar. Its rise continued steadily since then, breaking the 1,000 won to the dollar barrier at the beginning of this year. Though at one point in May it was trading at 920 won to the dollar, it has since withdrawn to a state of slight vacillation around 950 won. After the North Korean nuclear test the currency’s value fell to 960 won to the dollar, but it rebounded soon after.Recently, the currency’s value against the Japanese yen skyrocketed to 800 won per 100 yen. One export industry employee said "the fundamental cause of the yen’s weakness is the low value of the yen against the dollar, but the won’s worth is not falling and we are steadily suffering as a result." He lamented, "the double curse of a strong won and a weak yen is killing Korean industries." The financial and industrial sectors both agree that the won is overvalued. But while the consensus of the former group is that a rate of 1,000 won to the dollar is reasonable, the latter sees an even weaker yen as being more fitting. In any case, both sides agree that the won is overvalued by at least 5 percent. Businessmen in the industrial sector assign the blame for the strong won to the financial sector’s hasty borrowing of foreign currencies. An employee of the Hyundai Automotive Group asserted that "this year, the financial sector’s short term borrowing of foreign currencies jumped by $37 billion, and as a result, the increased supply of dollars in the exchange market caused a decrease in the won’s value." However, the analysis of the financial sector differs completely. They counter that the industrial sector’s excessive sale of dollars on futures foreign exchange markets has lead to a distortion of the won’s exchange rate. One official at the Bank of Korea commented that "the shipping industry has even sold off in advance all the dollars they will earn through 2010." The net sale of dollars by industries on futures foreign exchange markets throughout September totaled $28.7 billion. A shipping industry official said that "after seeing financial affairs consultants being laid off for not hedging in preparation for a rise in the won, we decided to hedge all the way." It is only natural that the won’s value would be on the rise with dollars being dumped into the market. The financial sector even assigns blame regarding the borrowing of foreign currency to the industrial sector. One manager at the Bank of Korea stated, "The more dollars that industry sells, the greater the foreign currency assets of the banks become, and thus in order to avoid the risks of exchange rate fluctuations, the debt in dollars must be increased or dollars must be sold on futures foreign exchange markets." This in turn, he said, leads to a rise in the won’s value. "These export firm CEOs say they are being killed by the exchange rate," said a government official, "but to them I say that they need to clamp down on the actions of their foreign currency managers, for these companies are being betrayed from within." However, industry officials fume that such rhetoric is but another instance of the government’s evasion of responsibility. One exporting industry employee wondered "whether or not the Bank of Korea or the government will take responsibility when the dollar falls again and more damage is dealt." The employee said that "rather than turning the blame on industry, the government should put forth a plan." The consensus in the industrial sector is that much of the ultimate culpability lies with the government’s failed management of foreign currencies. Though the government intervened in the currency market after 2003 to prevent the rise in value of the Korean currency, they ultimately suffered a colossal loss of more than 20 trillion won. "With the halls of the National Assembly ringing with criticism of the government’s failure to protect the won," one foreign exchange expert said, "the commonly held belief is that it will not be easy in the future for the government to intervene again."
