[Viewpoint] The Fundamental Solution to Exchange Rate Stability Lies in Business

The won-dollar exchange rate has reached the brink of 1,500 won. Apart from periods of economic crisis such as the 1997-1998 Asian financial crisis and the 2008-2009 global financial crisis, such a steep rise in the exchange rate is unprecedented. Even considering the ongoing restructuring of the international industrial and financial order, the weakness of the Korean won stands out compared to other currencies. Given that Korea recorded a current account surplus of $82.77 billion from January to September this year, and that the stock market has recently been booming, the depreciation of the won can be considered an abnormal phenomenon.

According to experts, one of the main reasons is that major Asian countries-including Korea, Japan, and China-have continued to expand their money supply even after the end of the COVID-19 pandemic. This stands in stark contrast to the United States, the United Kingdom, France, Germany, and Switzerland, which began monetary tightening around 2022. Considering that an increase in money supply tends to lower the value of a currency, it is only natural that the won has weakened more than the dollar, even during the recent period of dollar weakness. In particular, the domestic base interest rate remains 1.5 percentage points lower than that of the United States, significantly reducing the incentive for global capital to flow into Korea. For this reason, many experts blame the Bank of Korea for failing to raise interest rates at a time when monetary tightening was needed.

In addition, a large amount of domestic investment capital is flowing out to the United States and other overseas markets. Along with an increase in direct overseas investment by companies, individual investors are investing in foreign securities at a much higher rate than in the past. From January to September this year, direct investment recorded a deficit of $20.6 billion, while securities investment posted a deficit of $60.39 billion. Nearly $81 billion has flowed out of the country just this year, effectively offsetting most of the current account surplus.

The foreign exchange authorities are now facing urgent pressure. On November 24, as the won-dollar exchange rate surpassed 1,477 won, the Ministry of Economy and Finance convened a four-party consultative meeting with the Ministry of Health and Welfare, the Bank of Korea, and the National Pension Service to discuss measures to stabilize the exchange rate. At the meeting, the authorities discussed ways to harmonize the National Pension Service’s profitability with the stability of the foreign exchange market. The National Pension Service is expected to intervene in the foreign exchange market by adjusting the timing and amount of its strategic currency hedging.

However, such measures are only short-term responses. Most forecasts predict the Bank of Korea will freeze interest rates in December. With the exchange rate rising and the real estate market overheating, it is difficult to lower rates, but concerns over an economic downturn also make it hard to raise them. Due to continued pressure from the Trump administration in the United States, Korea will likely have to keep investing in the U.S., which could accelerate the outflow of dollars from next year. It is also unlikely that individual investors, known as “Seohak Ants,” will immediately abandon the U.S. stock market and return to the Korean stock market.

Devising a strategy to attract overseas dollars into Korea is the fundamental solution to stabilizing the exchange rate. Above all, the strength of the Korean economy must be enhanced. To achieve this, Korea must become a more attractive destination for investment. Various incentives should be provided to encourage foreign companies to establish headquarters and operate factories in Korea. The financial and capital markets must be elevated to global standards as soon as possible. It is also essential to ensure that companies listed on the Korean stock market are properly valued.

In this regard, one must question what the government and National Assembly are actually doing. While they claim to be making Korea a business-friendly country, in reality, are they not driving companies away by introducing new regulations? Now that President Lee Jaemyung has returned from overseas trips such as the G20 summit, he must devote himself to making Korea a better place to do business.