The Korea Herald


Stronger won best bet for economy: economists

By Korea Herald

Published : March 11, 2012 - 20:33

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Ronald Man, HSBC economist Ronald Man, HSBC economist
Jeong Young-sik, SERI research fellow Jeong Young-sik, SERI research fellow
Kwong Young-sun, Nomura Securities economist Kwong Young-sun, Nomura Securities economist
Exporters, manufacturers and domestic tourism operators wish the won was weaker. But allowing the currency to rise further against the dollar is the best option for the current state of the economy, economists say.

Economists at HSBC, Nomura Securities and Samsung Economic Research Institute said that while a stronger won traditionally means losses for exporters, letting it strengthen is in Seoul’s best interests as it has few options left for price control.

“Finance Minister Bahk Jae-wan himself projected the idea that the exchange rate fluctuation in the won has a greater impact on domestic prices than on exports. The government has never made such a strong sign that it would refrain from cheapening the won,” SERI economist Jeong Young-sik said.

A weaker won makes Korean goods cheaper abroad, and more competitive pricing means more growth and business confidence. But a cheaper won also bites into Koreans’ buying power for oil, raw materials and imports in general, contributing to the persistent inflationary pressure. Inflation has been the Lee Myung-bak administration’s biggest economic challenge since the end of 2010. The Bank of Korea, however, held off from raising the benchmark interest rate of 3.25 percent for a ninth straight month in March, taking account of the slowing domestic economy and risks from Europe’s debt crisis.

Ronald Man of HSBC says a strong won is desirable as altering the key interest rate is hardly an option now.

“HSBC sees that the won appreciating over the year will help decrease price pressure in Korea, especially oil, in won terms,” Man said.

Defying the common view that a stronger won could hurt exporters, Man pointed to the diminishing impact of the won-dollar rate on exports. His research shows that the movement of the won to the dollar has the least impact on exports among its movement against 10 currencies.

“Given Korea’s trade with the U.S. is among the least reactive to their FX cross rate over the long run, this shows that such movements add (only) temporary volatility in Korea’s current account.”

Man says that the exchange rate doesn’t matter much in the long run anyway.

“We find that quality of goods and the amount of research invested relative to their rivals in Japan play a more important role in retaining market share,” Man said.

Jeong notes that the won has risen about 3 percent but Dubai crude is up about 15 percent since the start of this year.

“One cannot expect any currency to fluctuate as much as commodities do, but the authorities are said to have managed to keep it relatively weak to sustain growth,” Jeong said. Korea’s BOK, like many other emerging market central banks, has a policy of intervening into the foreign exchange market to smooth volatility and slow the pace of appreciation.

SERI sees a strong correlation between the won/dollar rate and inflation, pointing to a need for a faster rise in the currency. It said inflation would rise 0.3 percent per 10 percent drop in the won against the dollar. It expects inflation to drop by 0.7 percent for every 10 percent gain in the won against the greenback. The won closed at 1,119 to the dollar on Friday.

Kwon Young-sun, an economist at Nomura Securities, says a stronger won against the dollar would strengthen the buying power of oil especially.

“Korea exporters in auto, electronics and IT industries are in direct competition with Japanese companies, so a stronger won against the U.S. dollar won’t affect them much unless the won/yen rate moves,” Kwon said.

“It needs a stronger won to manage oil prices, which are expected to go higher,” he added.

Emerging market currencies are widely expected to rise within the next few weeks as the liquidity operation by the European central bank spills over. European banks on Feb. 29 tapped the ECB for 529.53 billion euros in the second offer of the region’s refinancing program. Their first liquidity operation from December boosted emerging currencies of Europe and Asia.

Foreign investments into local stocks totaled a net of 3.9 trillion won in February, adding to the sum of 10.1 trillion won for this year alone. The net inflow for the past two months recouped 9.57 trillion won of outflow during November this year.

Net foreign holdings of local bonds rose by 1.8 trillion won ($1.6 billion) to 86 trillion won in February, according to the Financial Supervisory Service.

By Cynthia J. Kim (