[The Editors' Verdict] Will a Foreign Exchange Crisis Hit If the Exchange Rate Exceeds 1,500 Won?

What Is Vulnerable Is Not the Korean Economy, but Korean Politics

“The ongoing civil unrest and the rampage of the insurgents are increasing economic uncertainty, driving the already struggling lives of the people into ruin. This is clear when looking at the exchange rate, an indicator of the economic situation. The exchange rate fluctuated wildly after the declaration of martial law, and surged following the rejection of the impeachment, Yoon Seok-yeol’s additional statement, and Han Deok-su’s refusal to appoint a Constitutional Court justice.” (Lee Jae-myung, leader of the Democratic Party of Korea)

"Thanks to Acting President Han’s efforts, countries like the United States and Japan have declared their intention to normalize diplomatic relations, which has helped defend the exchange rate and foreign exchange market credibility. However, the impeachment motion against Acting President Han is pushing us back into a crisis. According to economic experts, if the exchange rate exceeds 1,500 won per dollar, a second foreign exchange crisis will occur." (Kwon Seong-dong, acting leader and floor leader of the People Power Party)

It is surprising to hear politicians talk about the ‘exchange rate.’ I am amazed that they have shown so much interest in the exchange rate. It is also surprising that they have been so concerned about the state of the Korean economy. Politicians look different now.

It is good to see them emphasizing the importance of the exchange rate and economic conditions, but I wish they would speak with a better understanding. It is true that the exchange rate surged sharply after the declaration of martial law on the 3rd and the rejection of President Yoon Seok-yeol’s impeachment on the 7th. The won-dollar exchange rate rose by 23.3 won and 14.0 won, respectively. President Yoon’s additional statement was made at 9:43 a.m. on the 12th. The opening price that day was 1,429.1 won at 9 a.m., and the closing price at 3:30 p.m. was 1,431.9 won. It only rose by 2.8 won. President Yoon’s additional statement did not affect the exchange rate.

Acting President Han Deok-su’s refusal to appoint a Constitutional Court justice and the Democratic Party’s impeachment motion against Acting President Han occurred during trading hours on the 26th. The opening price that day was 1,455.2 won at 9 a.m., and the closing price at 3:30 p.m. was 1,464.8 won. It rose by 9.6 won. This was not so much due to Acting President Han’s refusal to appoint a justice, but rather because the Democratic Party had declared since the 24th that they would impeach him if he refused the appointment, and they followed through on that promise.

On the 27th, the impeachment of Acting President Han became highly likely. The opening price was 1,467.5 won at 9 a.m., and the intraday high was 1,486.7 won, rising about 20 won. However, the closing price at 3:30 p.m. fell back to the opening price of 1,467.5 won, and the closing price at 2 a.m. was 1,470.5 won, similar to the previous day’s 2 a.m. closing price of 1,469.6 won.

As Representative Kwon said, the Han Deok-su acting administration has operated stably so far. It is Korean politics, not the Korean economy, that is heading toward a crisis. Of course, if political instability continues for several more months, the economic situation cannot be guaranteed.

That said, just because the won-dollar exchange rate exceeds 1,500 won does not mean a second foreign exchange crisis will occur. I would like to know who the economic expert is who said that. The Korean economy is not that vulnerable right now.

During the 1997 foreign exchange crisis, consecutive corporate bankruptcies caused banks to become insolvent. The banks, the lifeblood of the economy, had the worst ratings in all three major indicators: soundness, profitability, and liquidity. During the 2008 global financial crisis, soundness and profitability were okay, but foreign currency liquidity was a problem. Currently, all three major indicators are favorable. Dollar borrowing in the foreign currency funding market is proceeding smoothly.

The vulnerable issue is not the Korean economy but Korean politics. The political sphere, which has failed to reach bipartisan agreement on the recommendation of Constitutional Court justices and has even led to the impeachment of the acting president, is truly the problem. I will return the words of Representative Lee Jae-myung and Representative Kwon Seong-dong to them as they are. Such extreme confrontational politics “increase economic uncertainty, driving the already struggling lives of the people into ruin” and “(as a result) are pushing us back into a crisis.”