The won's exchange rate plummets, 68 trillion funds urgently flee, can the South Korean economy hold on?

According to a report by Phoenix News, this year, due to the postponement of the Federal Reserve's interest rate cut expectations, the won's exchange rate has seen a sharp decline. As of May 16th, the won's exchange rate against the US dollar has fallen by more than 5.5%, with 1 US dollar now being exchangeable for 1366.12 won.

Affected by this, the won has also become one of the worst-performing currencies in the context of the US dollar's reaping of Asian wealth in this round.

More importantly, with the sharp drop in the won's exchange rate, international capital is fleeing South Korea in a stampede. According to official data released by the Bank of Korea, as of the end of April this year, South Korea's foreign exchange reserves stood at 413.26 billion US dollars. It is worth noting that in 2021, South Korea's foreign exchange reserves were as high as 463.12 billion US dollars.

This means that in just three years, a cumulative 49.86 billion US dollars of international capital has fled from the South Korean market. If calculated at the current exchange rate, this amount of funds is worth 68.1 trillion won.

Advertisement

In other words, with the reaping of the US dollar's scythe, the South Korean economy may not be able to hold on.

Many people are puzzled, hasn't South Korea always been closely following the United States' footsteps? Why has the won fallen so badly in the context of this round of US dollar interest rate hikes?In fact, South Korea's success and failure both hinge on the same factor, what does this mean?

Firstly, South Korea's economy is heavily reliant on import and export trade.

It is well-known that South Korea, as a small country with a land area of only 103,000 square kilometers and scarce resources, has an economic development that is heavily dependent on import and export trade. This structure is quite precarious because if the global economy takes a downturn, it will inevitably be the first to suffer. For instance, last year, due to geopolitical conflicts and the continuous interest rate hikes by the Federal Reserve, global economic growth was sluggish, and South Korea's import and export trade was immediately affected. According to statistical data released by the Ministry of Trade, Industry, and Energy of South Korea, South Korea's export volume in 2023 was $632.69 billion, a decrease of 7.4% year-on-year, marking a negative growth after three years.

Moreover, in 2023, South Korea's import volume was $642.67 billion, a decrease of 12.1% year-on-year, with a trade deficit of $9.97 billion, and this was the second consecutive year of a deficit. In other words, last year's foreign trade data for South Korea was quite bleak. Consider that the trade data, which is a pillar of the economy, is so dismal, how could international capital not flee? With international capital fleeing, how could the exchange rate not depreciate?

Secondly, South Korea places its bets on the United States as a trade partner.According to relevant statistical data, South Korea's export volume to the United States in 2023 was $115.7 billion, with automobile exports alone increasing by 44.6% year-on-year. In contrast, last year's export volume from South Korea to us declined by 19.9% year-on-year. This rise and fall clearly indicate that South Korea is changing its trade pattern.

Although its intention is good, it overlooked one point: last year, the United States experienced a slowdown in economic growth due to high interest rates and inflation. In other words, not only did the demand decrease, but the United States also needed South Korea to export cheaper goods. Naturally, the lower export prices would also affect the exchange rate of the South Korean won.

With the US dollar being high-interest, international capital would naturally flee, which is a double blow to the already fragile won exchange rate.

In fact, the impact of this round of the US dollar's "harvest" on the South Korean economy is very significant. If not handled well, the South Korean economy could repeat the economic crisis of 1997.

As I mentioned earlier, the South Korean economy mainly relies on imports and exports. On one hand, the sharp drop in the exchange rate leads to a sharp decrease in the profit of commodity exports. In other words, not only do the sold goods not make money, but they may even lose money.

If enterprises cannot make profits, they will be forced to close in large numbers, and the bankruptcy of enterprises will lead to employee unemployment.

In addition, the sharp drop in the exchange rate will further increase the cost of importing South Korean goods. Higher costs will lead to rising prices. At that time, with a large number of employees unemployed and inflation remaining high, the history of economic collapse may have to be replayed.