Exchange Rate Heading to 1500 Won... Is Korea Following Turkiye?

2016 Coup Attempt Aftermath: Turkish Lira Plunge
Investors Keep Leaving Despite Resolution
Policy Errors, Not Political Instability, Impact

The value of the Korean won is declining amid the ongoing impeachment crisis following the martial law situation. The major U.S. bank Bank of America (BoA) has issued a grim forecast that the won exchange rate could further fall to the 1,500 won per dollar range.

While exchange rates are influenced by various macroeconomic factors, political instability is a key issue dominating short-term outlooks. In many countries, especially developing nations, exchange rates have weakened whenever political unrest spread. The country that suffered the most dramatic direct impact was T?rkiye.

The Turkish Lira Plummeted Over 4% Due to the 2016 Coup Attempt

The former Turkish Air Force Commander, who was sentenced to aggravated life imprisonment in 2020, four years after the failed military coup in 2016. Photo by AP Yonhap News

The value of the Turkish lira has steadily declined against the U.S. dollar over the past decade. However, the trigger for the sharp downturn was the 2016 military coup attempt. At that time, a faction of the Turkish military judged that President Recep Erdo?an’s government threatened T?rkiye’s secularism and democracy, and launched a rebellion to overthrow it, but the coup was suppressed within just six hours and failed.

T?rkiye has a tradition where the military has used force to 'protect' democracy, so it cannot be directly compared to Korea’s history of confrontation between authoritarian governments and civil society. However, political instability negatively affected financial markets, especially exchange rates, just as it did in Korea. In the week following the coup attempt, the lira’s value plunged about 4%, forcing Turkish financial authorities to exert all efforts to stabilize the market.

Failed Coup Accelerated Negative Policies

Ironically, the root cause of the Turkish lira's weakness is analyzed to be the government's excessive financial intervention, which became even stronger after the failed coup attempt. Yonhap News Agency

However, even after the coup attempt was over, the lira continued to deteriorate. The cause of the lira’s subsequent weakness was not political instability from the coup itself. Ironically, President Erdo?an’s excessive intervention in financial markets after gaining unchecked power following the failed coup triggered anxiety among global investors.

For several years after the coup, President Erdo?an pressured the central bank to maintain low interest rate policies to stimulate the economy. This exacerbated T?rkiye’s chronic inflation and burdened the lira. Meanwhile, Erdo?an announced a policy to 'defend' the lira by having the government compensate for the difference caused by the lira’s sharp depreciation, but this policy instead heightened inflation concerns and further weakened the lira.

Today, the value of 1 lira is about 41 won. Fourteen years ago, it was approximately 800 won per lira. Due to the enormous exchange rate decline, T?rkiye still suffers from severe inflation, but on the other hand, it has achieved remarkable results in some industries such as tourism and electronics manufacturing by leveraging much more competitive prices compared to other countries.

Political Instability Affects Short-Term, Fundamentals Matter Long-Term

Kim Byung-hwan, Chairman of the Financial Services Commission (from the left), Lee Bok-hyun, Governor of the Financial Supervisory Service, and Lee Chang-yong, Governor of the Bank of Korea, are leaving after a macroeconomic and financial issues meeting on the morning of the 6th at the Bankers' Hall in Jung-gu, Seoul. Photo by Yonhap News.

So what about the future of the Korean won? In a report released on the 7th (local time), BoA forecasted that "there is a high possibility that the won’s value will sharply decline in the Seoul foreign exchange market on the 9th due to the failure of the impeachment vote against President Yoon." Indeed, since entering the 'impeachment phase,' the won has weakened not only against the dollar but also against nearly all other currencies. This is evidence that the foreign exchange market (FOREX) avoids political instability.

However, it is difficult to view the won’s future as bleak immediately like some developing countries. While short-term exchange rate weakness may be determined by political events, subsequent movements depend on fundamentals. The lira’s collapse was closer to the result of policy errors that increased after the coup rather than the coup itself.

In contrast, even though Korea is currently facing an unprecedented standoff between the executive and legislative branches, the independent central bank and financial authorities are performing their roles. The government and the Bank of Korea are continuously monitoring domestic financial markets and foreign investor sentiment through the Macro-Financial Issues Meeting (F4 meeting).

Bank of Korea Governor Lee Chang-yong analyzed at a press briefing on the 5th, "The exchange rate sharply rose to 1,444 won at dawn when martial law was announced, but it fell again after martial law was lifted, and since then, it has shown a stable trend," indicating that the short-term financial market is rather calming down.