Martial Law Fallout Currency Shock... Will Import Prices Rise Again? [Chosun Price Records]

(44) Won-Dollar Exchange Rate Hits 1,446.5 Won
Overseas Travel Costs Rise... Import Prices Also Increase

Since President Yoon Seok-yeol's declaration of martial law, political instability has spread, causing the won-dollar exchange rate to fluctuate sharply. Although consumer prices rose by 1.5% compared to a year ago last month, maintaining a price increase rate in the 1% range for three consecutive months, if the won-dollar exchange rate continues to rise above 1,400 won as it is now, there is a growing possibility that the inflation rate will approach 2% again.

Exchange Rate on the Rise... Could Martial Law Add Fuel to the Fire?

With raw material prices rising significantly, the exchange rate surged due to the highlighted political risks in Korea, increasing the possibility of further rises in import prices. According to the Bank of Korea, import prices in October (based on the won) rose 2.2% month-on-month due to the increase in the won-dollar exchange rate and international oil prices. Import prices based on contract currency, excluding the exchange rate effect, rose 0.7% month-on-month, while the remaining 1.5% increase is interpreted as resulting from the depreciation of the won.

Since import price increases due to the won's depreciation were already anticipated before the martial law declaration, and the exchange rate surged further amid spreading political risks, concerns are growing that future price trends may become unstable. According to the Korea Customs Service's export-import trade statistics, the import price of coffee beans in November this year (provisional) was 32,502 won per kg, a 36.5% increase from the import price of 23,813 won at the beginning of the year. While the price rise was partly due to coffee bean crop issues, the exchange rate also rose sharply during this period. The won-dollar exchange rate (monthly average transaction rate) rose more than 5%, from 1,323.57 won in January to 1,393.28 won in November.

Other agricultural and livestock products also saw price increases compared to the beginning of the year. The import price of beef per kg rose 19%, from 10,715 won at the start of the year to 12,752 won last month. Flour increased 9.3%, from 1,370 won in January to 1,497 won last month, and cooking oil (soybean oil) rose 7.1%, from 1,749 won to 1,872 won.

President Yoon Suk-yeol declared martial law. On the morning of the 4th, when martial law was lifted by the National Assembly's resolution, the electronic board in the Hana Bank dealing room in Jung-gu, Seoul displayed the KOSPI, won/dollar exchange rate, and KOSDAQ indices that started trading that day. Photo by Yonhap News

Kim Woong, Deputy Governor of the Bank of Korea, said at the price situation review meeting on the 3rd of this month, "The consumer price inflation rate is expected to approach 2% for the time being due to base effects and the impact of the rising exchange rate," adding, "Core inflation (excluding energy and food) is expected to maintain a stable trend at the current level."

He continued, "Although the recent rise in the exchange rate has had a limited impact on prices so far, considering the time lag of the ripple effect, it will be reflected from December onward," and noted, "Future inflation outlooks may vary depending on exchange rate and oil price trends, domestic demand flow, and adjustments in public utility charges. Attention should also be paid to the inflationary impact of corporate price adjustments at the end and beginning of the year."

Rapid changes in the exchange rate act as a factor that increases inflationary pressure.

Industries sensitive to raw material price fluctuations or items with high import dependence are particularly affected by exchange rate changes. The duty-free industry has also been hit hard. Due to the high exchange rate, domestic demand for duty-free goods has decreased, and with the martial law situation causing further exchange rate surges and increased anxiety, travel and consumption may decline, making additional damage inevitable. Costs for overseas travel requiring dollar payments, overseas direct purchases, overseas tuition fees, and English certification exams may also increase.

Exchange Rate Rollercoaster Shaken by 'Martial Law'

Despite active market stabilization measures by foreign exchange authorities following President Yoon's declaration of martial law, political instability in the country has increased, strengthening the preference for the safe-haven dollar.

In the Seoul foreign exchange market on the 3rd, the won-dollar exchange rate closed at 1,402.9 won. However, on the same day, immediately after the martial law declaration, the exchange rate surged, reaching 1,446.5 won at 11:50 p.m. The won-dollar exchange rate reaching 1,446.5 won is the first time in 15 years and 8 months since March 15, 2009 (1,488.0 won) during the financial crisis.

The exchange rate, which had been shaken by the shock of martial law, stabilized around 1 a.m. on the 4th. This was after the National Assembly passed a resolution demanding the lifting of martial law in the plenary session, and the government announced that it would mobilize all financial and foreign exchange market stabilization measures, including liquidity supply, to respond to market instability caused by martial law. Subsequently, at 2 a.m., the exchange rate fell to 1,425 won per dollar and closed at 1,410.1 won.

However, as the country enters a 'impeachment political crisis' and political instability continues, the volatility of the exchange rate is likely to persist for the time being. In fact, with the possibility of a second martial law declaration being mentioned, the exchange rate is showing a sharp upward trend again. As of 11 a.m. on the 6th, the won-dollar exchange rate surpassed 1,429 won.