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Brighter Side of the Cheapening Won

Between the abyss of the COVID-19 pandemic, global inflation worries, and the tapering tantrum, one of the most prominent developments in the financial world is the fact that the dollar has gotten very strong throughout 2021. This year, the dollar index has hovered around 89 in January to 96 in December. It is very surprising and contrasting as the dollar index was precipitously dropping in 2020. The dynamics behind this stronger dollar turnaround is obvious. The interest rate in the US was expected to rise in the midst of a very robust real economy. With strong economic growth and job creation, it was natural to see the dollar’s strength as a safe haven in times of a worldwide pandemic and inflation.

While the stronger dollar means the weakening value of other currencies, it was typically the Korean won whose rate depreciated more than other currencies. The won has dropped in value by 10.5 percent from January to October 2021, and are showing no signs of retreating back to the level below 1100 won per dollar.

This extraordinary won depreciation was a welcome blessing for Korean economy, which has been striving to create more jobs and economic livelihood under severe distress of the effects of the pandemic. In fact, domestic personal consumption showed no sign of substantial growth despite astronomical subsidies and compensation from the government throughout this year, and construction investment failed to recover from last year’s level.

In short, the domestic portion of Korean economy contributed little for 2021, but it was the export performance that led its economic growth. Until November 2021, exports have increased by almost 27 percent, and this seems to be the best record in more than ten years. It has significantly contributed to economic growth for 2021. Of course, export growth has to be inevitably high due to the base effect of 2020, but it is also certain that the weak won has contributed significantly to such excellent export performance.

Another very important, but easily neglected point about the won rate is its effect on foreign investment into Korea. The weak won would make investing in Korea very cheap for foreign investors. Stocks, bonds, or real estate in Korea have turned into bargain items when the won exchange rates soar.

The statistical data manifests its evidence. In the second and the third quarters of 2021, the year-over-year growth rates of foreign direct investment into Korea marked 497 percent and 206 percent, and portfolio investment to Korea grew 127 percent and 41 percent for the same period. It is striking U-turn from the first quarter of 2021, when foreign investors were withdrawing from Korea. Despite a little bit of inflationary effect, the recent depreciation of the won against the dollar has become manna for the pandemic-ridden Korean economy, instilling hope that this trend will continue for a while longer.

By Professor Se Don Shin
Professor Emeritus, Sookmyung Women’s University

The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA

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