[Inside Chodong] The Warning Sound of the '1,422 Won High Exchange Rate'

Last year, the average won-dollar exchange rate reached 1,422 won, marking an all-time high. This is the first time the annual average has entered the 1,400-won range, surpassing both the foreign exchange crisis (1,395 won) and the global financial crisis (1,276 won). Last year, the value of the Korean won stood out for its sharp decline compared to other currencies such as the euro, pound, yuan, and yen, earning it the reputation of being the weakest currency globally. Concerns are mounting that, as in the past, the plummeting value of the won is sounding alarm bells for the Korean economy.

However, if we look for actual signs of crisis, there are none. Foreign exchange reserves, which serve as ammunition to defend the exchange rate, stand at $430.6 billion. While this does not meet the International Monetary Fund (IMF) recommended level, it remains solid. Similarly, net external financial assets, which also help defend the exchange rate, have maintained a surplus of over $1 trillion, differing from past crises. The short-term external debt ratio is also low, at around 35%, and the credit default swap (CDS) premium, which indicates default risk, is at a stable level of 21.90 basis points. Judging by these indicators alone, the likelihood of facing a crisis due to an inability to repay external debt, as in the past, is extremely low. So, why the concern?

According to last year's ranking of net capital inflows into the U.S. stock market by country, released by the U.S. Treasury Department, Korea ranked first (net inflow of $53.2 billion from January to September), excluding tax havens such as the Caribbean and Cayman Islands. Korea outpaced Japan ($28.3 billion) and Singapore ($48.9 billion), both of which have economies two to three times larger. This is the result of a significant increase in overseas investments by individual Korean investors and the National Pension Service. Despite the domestic stock market heading toward KOSPI 5000, investors have determined that it is more prudent to invest overseas rather than in domestic assets.

The exchange rate, a fundamental indicator of a country's economic strength, directly reflects the economic conditions of both countries involved. Due to domestic market instability, skyrocketing housing prices, and structural crises stemming from low birth rates and an aging population, Korea’s potential growth rate has fallen to the 1% range. In contrast, the United States, with an economy 17 times larger, continues to enjoy annual growth rates of over 2%. The interest rate inversion has persisted for more than 41 months. On top of this, expansionary fiscal policy is in play. Promising AI companies aiming to become the next OpenAI or Nvidia are concentrated in the U.S. during this expansion phase of the artificial intelligence industry. As liquidity continues to increase, the economy slows, and expected returns on domestic assets remain low, it is only natural for capital to keep flowing to the United States.

Furthermore, export companies that generate more than $100 billion in current account surpluses each year are hoarding their earned dollars instead of exchanging them and releasing them into the market. In response to U.S.-led protectionism and the global trend of prioritizing domestic interests, these companies are massively increasing their overseas direct investments. As they shift production bases abroad, they are not bringing foreign-earned profits back to Korea, and under tariff agreements, they must remit $20 billion to the U.S. annually for the next 10 years. There is widespread speculation that the structural imbalance in supply and demand-where individuals, companies, and institutions all demand dollars at the same time-will cause significant volatility in the value of the won.

This kind of structural capital movement cannot be blocked by temporary, short-term measures such as tax breaks or mobilizing the National Pension Service for currency hedging. As expectations for a high exchange rate and preference for the dollar accelerate capital outflows and deepen the structure in which overseas earnings do not return to Korea, warnings are emerging that the Korean economy is entering a "Taiwan-style recession," characterized by export booms and a collapse of the domestic market base. Ultimately, the only way to redirect investment back to Korea is to restore trust in Korean companies and the economy. Long-term measures must be pursued simultaneously: easing regulations that hinder investment and creating a virtuous cycle where export growth leads to increased domestic investment.