[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 was the first time the annual average exceeded the 1,400-won level, 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 as the weakest among major global currencies, with a particularly sharp decline compared to the euro, pound, yuan, and yen. As the won continued to plummet, concerns have been raised that warning signs are once again flashing for the Korean economy, reminiscent of past crises.

However, when examining whether there are actual signs of crisis, the answer is no. Korea’s foreign exchange reserves, which serve as ammunition for defending the exchange rate, stand at $430.6 billion. While this falls short of the International Monetary Fund (IMF) recommended level, it remains robust. Similarly, Korea’s net external financial assets, which also help defend the exchange rate, have maintained a surplus of over $1 trillion, marking a clear difference from past crises. The short-term external debt ratio remains low at around 35%, and the credit default swap (CDS) premium, which indicates default risk, is stable at 21.90 basis points. Judging by these indicators alone, the likelihood of Korea facing a crisis due to an inability to repay foreign debt is extremely low. So, what is the issue?

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 (with a 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 Korean retail investors and the National Pension Service. Despite the domestic stock market racing toward the KOSPI 5000, investors have become pessimistic about domestic assets and determined that shifting investments overseas is the right direction.

The exchange rate, a fundamental indicator of a nation’s economic health, directly reflects the economic conditions of both countries. Korea’s potential growth rate has slumped to around 1% due to domestic market instability, skyrocketing housing prices, and structural crises arising from low birth rates and an aging population. In contrast, the United States, with an economy 17 times larger, continues to achieve annual growth rates above 2%. The interest rate reversal has persisted for over 41 months. On top of this, expansionary fiscal policy has been implemented. Promising AI companies targeting the future of OpenAI and Nvidia are concentrated in the United States during this period of artificial intelligence industry expansion. As liquidity continues to flow into the market while the economy slows and expected returns on domestic assets remain low, capital inevitably continues to flow toward the United States.

In addition, export companies, which generate more than $100 billion in current account surpluses each year, are simply accumulating the dollars they earn instead of exchanging them and releasing them into the market. In response to U.S.-led protectionism and global prioritization of domestic industries, they are massively increasing overseas direct investment. By relocating production bases abroad, companies are not bringing their foreign earnings back to Korea, and due to tariff agreements, $20 billion must be sent to the U.S. every year for the next 10 years. There is a widespread expectation in the market that the value of the won will be significantly shaken due to a structural imbalance in supply and demand, with simultaneous demand for dollars from individuals, companies, and institutions.

This kind of structural capital movement cannot be stopped by temporary, short-term measures such as one-off tax reductions or hedging by the National Pension Service. As expectations for a high exchange rate and preference for the dollar accelerate capital outflows from Korea and deepen the structure in which overseas earnings are not repatriated, warnings are now being issued that the Korean economy is entering a “Taiwan-style recession,” characterized by booming exports and the collapse of the domestic market base. Ultimately, restoring confidence in Korean companies and the economy is the only way to redirect investment back to Korea. Long-term measures must be pursued simultaneously to ease regulations that hinder investment and to create a virtuous cycle in which export growth leads to increased domestic investment.