Unremitting KRW weakening to cause broad adverse effect on Korean economy

2022.04.28 14:40:42 | 2022.04.28 20:09:40

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Unremitting weakening in the Korean won darkens the prosect for Korea`s economy heavily reliant on commodities imports for production of goods for exports and consumption, while inflation is already at its highest in a decade.

Korea’s trade account dipped to $3.96 billion in the red in the first quarter, recording its first quarterly deficit in 13 years and six months, according to the Korea Customs Service.

Although exports were strong, imports galloped faster in double digits as prices of oil and other commodities spiked amid global supply shortage, which worsened by the Russia-Ukraine crisis.

Economists project Korea’s trade, the main driver of its economic growth, to deteriorate further, pointing to a 7.4 percent on-year plunge in net terms of trade index, the ratio between the export price index and import price index, in February. The index has been sliding 11 months straight, according to Bank of Korea’s data.

Since the gauge for trade terms tends to move about six months ahead of the Korean won, the country is expected to experience a vicious circle where weak Korean won fans growth in import prices to widen trade deficit, which in return further depreciates the local currency’s value.

Also, weak currency drives up consumer prices and dampen purchasing power and domestic demand.

Overly weak Korean won versus the U.S dollar hurt investment on manufacturing facilities and equipment as well. The country’s machinery and equipment investment plunged 4.0 percent on quarter in the first quarter, the worst since 8.3 percent fall in the first quarter 2019.

The gross domestic product in the January-March period grew just 0.7 percent due to fall in consumer and corporate spending.

Korea’s central bank forecast the country’s machinery and equipment investment to rise 2.2 percent this year, sharply down from 8.3 percent last year, due partly to higher import cost.

Expensive imports can also aggravate inflation and further weigh on private consumption.

Korean consumers expect inflation to average 3.1 percent over the next 12 months, according to Bank of Korea’s data released on Wednesday. That is the highest in nine years.

Consumer prices already rose 4.1 percent on year in March, the fastest in 10 years and three months.

Rising prices would pressure the central bank to raise interest rates, which would further restrain spending.

Foreign reserves have also thinned to $457.8 billion in March due to the greenback’s strengthening.

The U.S dollar has breached 1,270 won level Thursday, just a day after breaking the 1,260 won threshold.

By Kim Jung-hwan and Cho Jeehyun

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