Korean won-dollar exchange rate, how will it affect the Korean economy?

Currently, the Korean Won-Dollar exchange rate has risen tremendously over the past few weeks. The exchange rate was 1,062 won to a dollar on September 1^st which changed to 1,193 won to a dollar on September 26^th. This 12.3 percent drop in the value of Korean won has caused serious loss to South Korean households and firms which buy imported products. For instance, sandwiches which would normally cost 4000 won(approximately $3.76) on the September 1^st will now be 4492 won(around $4.23). Also, the stock market fell tremendously on October and continues to drop.

However, this is something that South Korea had gone through in 1997-1998 when it experienced a financial crisis. During that period millions of Koreans lost jobs and oil prices sky rocketed affecting other prices to rise. However, the Korean economy quickly recovered in a year and showed better growth rates than before the crisis. Also, it went through the 2008 global financial crisis and recovered.

So, will Korea be able to recover from this massive depreciation of Korean won?

I picked two articles: an article from the Economist, one of the world’s famous magazines, and one from Hankyoreh, one of the top four most read newspapers in South Korea. They both write about depreciating value of Korean currency(Won) and how this will affect the future Korean economy. However, on the same topic, they predict different futures of Korean economy.

The Economist expects a positive future for the Korean economy. Although the won has been weakening significantly, since Korea is an export oriented society, this drop in the value of Korean won will be beneficial for exporters since they can export more at a cheaper price. Also, since the Bank of Korea, which is the Korean central bank, has foreign reserve of $312 billion, which is larger than was in 2008, the central bank has control over the exchange rate and can bring the value of Korean won up if the exchange rate drops. Moreover, the Economist writes that Korean commercial banks are less reliant on short-term, foreign denominated debt than in 2008. Due to these factors the Economist predicts the Korean economy to possess little danger and can be a comparatively safe place to invest money in.

On the other hand, the Hankyoreh, a Korean newspaper, points toward a different direction. The article in the Hankyoreh’ refutes most points made by the Economist. Based on data and interviews with government officials or bankers, the Hankyoreh shows no confidence to the Bank of Korea’s foreign reserves In contrast to the Economist’s data, which said Bank of Korea spent $4billion to stop the exchange rate from going further down, the Hankyoreh wrote that Bank of Korea spent close to $10billion. Which one is true? Recently there was news about Bank of Korea’s foreign reserves. The news says that foreign reserves have decreased significantly from having $312billion to barely keeping $300billion <“South Korea Forex Reserves Fall by the Most in Almost 3years in September”>. The Hankyoreh’s data was right. Also, the Hankyoreh does not believe that the amount of short-term borrowings by financial institutions is low. It says short-term borrowing amounts to $101.5billion which it believes to be high. Foreign investors are buying speculative dollars expecting a great fall in the foreign exchange market and foreign investors who have already invested in the Korean stock market are now fleeing due to 11% decrease in the KOSPI index(Korean stock market index). The Hankyoreh says all of these incidents remind it of the Lehman Brothers collapse. It ends by quoting a commercial bank foreign exchange dealer. “If a Greek default comes to pass, we will go past 1,200, and we will probably go straight to 1,600 [won to the dollar].”