[Inside Chodong] Era of 1,400 Won Exchange Rate: The Growing Poverty of the People

Changhwan Lee, Deputy Head of the Economic and Financial Department

On the night of the 3rd, when martial law was declared, my acquaintance A, who was on a business trip to Europe, urgently contacted me. "What on earth is happening in Korea?" In disbelief, I replied, "I feel like this is a scene from a movie." A said that while the martial law was shocking, the skyrocketing exchange rate was even more bewildering. A was using a travel card that reflects real-time exchange rates at a restaurant, and suddenly noticed that the food bill seemed to have increased significantly when trying to make a payment.

That day, not only A but also expatriates of our companies abroad, international students, and travelers all experienced the unpleasant reality of the rapid depreciation of the Korean won's value. Overseas employees of our companies who receive salaries in won will face tougher living conditions, and international students will experience automatic increases in tuition fees. Despite working hard, they are experiencing becoming poorer without realizing it.

Our stagnant national income is one of the indicators showing that we are becoming poorer compared to other countries. Korea's Gross National Income (GNI) per capita surpassed $30,000 for the first time in 2014 and has remained in the $30,000 range for ten years. Until recently, the government confidently stated that we could achieve a national income of $40,000 in the near future. However, if the won continues to depreciate like this, we should worry not only about reaching $40,000 but even maintaining $30,000. If you find it hard to believe, just look at neighboring Japan. Japan's national income peaked at $50,000 in 2012 and has been declining since, now falling below ours. I heard that young Japanese people are coming to Korea to earn money these days, and it's not without reason.

The bigger problem is that the exchange rate is unlikely to fall easily in the future. For the won to appreciate, fundamentally, our economy and corporate performance must improve, attracting more investment funds (in dollars) into the country. However, next year, our economic growth rate is expected to fall below the potential growth rate of 2%, and many of our key industries have long lost competitiveness, having been caught up by China. In fact, this year, our stock market's growth rate is worse than that of countries at war like Russia or Israel. Citizens are converting won into dollars to leave the hopeless domestic stock market and invest in U.S. stocks, while foreign investors are continuously net-selling Korean stocks amid concerns about economic slowdown, taking dollars and leaving Korea. For the global dollar strength to stop, the U.S. must quickly lower interest rates, but since Trump's election, inflation concerns have risen again, and the pace of U.S. rate cuts is expected to slow. All these factors contribute to the depreciation of the won.

The foreign exchange authorities currently state that considering our foreign exchange reserves and net external financial assets, the current exchange rate situation is manageable and that they will not intervene excessively. They can respond to excessive volatility such as sharp rises or falls but will not interfere with the natural flow of the exchange rate. Just as we had to adapt to high prices like soju at 5,000 won and jajangmyeon at 8,000 won, we now have to live in an era where we must adapt to a high exchange rate. Ultimately, to raise the won's value, there is no other way but to strengthen our economic growth potential and corporate competitiveness, solidifying our fundamentals. Since the martial law situation was brief and the impeachment was passed, it is now time for the government and political circles to put all their efforts into revitalizing the economy.