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back to index backASIAtalk May,  2007

Korea Embraces The Rising Won

As South Korea approaches the 10th anniversary of the Asian Economic Crisis, when the value of the won crashed from 880 to more than 2,000, it is currently facing a new currency crisis. Ironically, this new crisis” is a direct result of the won’s approach to its former rate back in mid-1997.

The export sectors remain alarmed that further won appreciation beyond the psychological 900 won barrier could begin to cut deeply into export markets. The Korean press also has taken up the mantra, citing Korea’s burgeoning trade deficit in the service sector.

The situation is deemed so serious that Seoul has renewed measures to stem the rise by encouraging an outflow of Korean investment into foreign markets. However, as usual, the picture is more complicated than is presented in the Korean press.

A Tale of Two Sectors: Exporters & Importers – Predictably, the seemingly inexorable rise of the won against the dollar has been sending alarm bells through Korea’s major exports enterprises and sectors since late 2006. Hyundai and KIA began the year with projections that the won would soar to 880, a rate last seen in August 1997. At that rate, foreign exchange losses would carve almost 980 billion won out of a projected operating profit of 1.5 trillion.

Of course, a firm cannot increase prices as (a) the won’s rise already is pressuring foreign sales prices and (b) the won has risen against the Japanese yen. As Korea and Japan are in direct competition in most export sectors, that fact alone will create a price floor below which Korea cannot sink. The shipping/maritime transport industry, Korea’s third-biggest export industry in 2005, suffered collapsing profits in 2006 that were only a quarter of the level in 2005, despite having actually increased revenue by 5-8 per cent.

However, the picture even on exports is mixed. Although exports began to decline in the fourth quarter of 2006 (down one per cent compared to the fourth quarter of 2005), exports still advanced 13 per cent on the year. Some sectors, such as shipbuilding (expected to reap at least US$30 billion for the Big 3 – Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding – are still powering along. So, too, are overseas construction orders, the number of which rose 57 per cent in the first two months of 2007 over the same period of 2006.

For importers, however, it is a different story, as the strong won has driven down import costs. One executive of a mid-sized corporation that produces for domestic consumption reported production cost savings of 20 per cent. Industries such as petrochemicals and pharmaceuticals can expect to enjoy healthier profit margins over coming months.

Private Sector – While exporters are crying, the Korean public is flying. The won is soaring so high that Koreans now deem Japan to be cheap (the yen has fallen roughly 30 per cent against the won since 2004). A record two million Koreans visited Japan in 2006, spending was up 30 per cent over the year before, and 2007 is on track for a repeat.

One frequent business traveller to Japan reported that it was cheaper to play golf in Japan than in Korea, and that the prices of Japanese products ranging from online golf clubs to food in stores have declined 10-30 per cent in won terms. Koreans are now travelling overseas in record numbers. Cambodia, for example, has just announced that Koreans comprised the single largest number of visitors, and Korean visitors to the US spent 22 per cent more in 2006 than the previous year.

Meanwhile, private investments are going overseas as well. Individual purchases of overseas real estate by South Koreans jumped 57 times in one year to reach US$514 million in 2006. A recent survey of Korean investors in stocks and bonds revealed that a sizeable 44 per cent owned foreign assets, and that 77 per cent of these had entered the market within the last year. Such outflows should contribute to won stability, which is exactly the Government’s intention.

Government Measures – The Roh Administration has been seeking novel ways to hold the Korean won steady. Unable to lower interest rates because that might fuel an already-overheated housing market, the Government announced in mid-January that, from late March to 2010, capital gains from overseas investment funds will be tax-exempt (compared to the 14 per cent now).

In February, restrictions on foreign asset management companies were also eased, along with restrictions on Koreans owning real estate – to the delight, no doubt, of the flood of elderly Koreans seeking to retire in less expensive, sunnier climes. Finally, Koreans will not even have to report their foreign real estate-destined accounts to the Bank of Korea.

However, other measures, especially in the educational sector, belie the confused state of public policy decision-making. Although large outflows in educational expenditure actually serve to dampen the won’s rise, the Government is finalising plans to enable overseas educational institutions to directly open campuses in Korea, as well as establish English Towns”.

Although such measures may keep educational won from turning into export dollars, the Administration’s egalitarian educational goals of reducing the qualifications gap (and thus job opportunities) between those able to study abroad and those who cannot, override the goal of won/dollar stabilisation, at least where education is concerned.

Thus, all is not (or at least should not be) doom and gloom. Korean export sectors seem to be adapting to a structurally high (against the internationally weak dollar at least) won for the foreseeable future, and the average Korean is increasingly experiencing a world of opportunities that have become within their financial reach.

Source: Asia Today OnlineGAI

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