Soaring Won Value
The Korean won has depreciated at the most rapid rate in the world in the past month. Under the circumstances, a sudden withdrawal of funds is expected to have a particularly significant impact on the domestic financial market and the national economy as a whole.
The won-dollar exchange rate soared by no less than 6.3 percent from 1,098.9 won to 1,167.9 won per U.S. dollar between June 22 and July 24. At the same time, the increase in the exchange rate stood at 2.4 percent for South Africa, 1.5 percent for Turkey, 0.7 percent for Indonesia, and 0.5 percent for India. The percentage added up to 6.1 percent for Brazil during the same period.
Until recently, Korea was one of the most favored destinations for foreign investors. The won-dollar rate dropped a lot, although the MSCI Emerging Market Currency Index reached 1,518 points in March, the lowest level since the European fiscal crisis in 2010. A net inflow of foreign funds into the Korean stock and bond markets continued for four months in a row until May, too. Some experts mentioned Korea as an advanced emerging market or a safe haven.
However, a series of adverse factors piled in at the same time. Korea recorded a quarter-on-quarter growth rate of 0.3 percent in the second quarter, while the prices of gold and oil plummeted. Also, interest rate gaps narrowed and the Korean government came up with an overseas investment promotion plan to reduce its dollar reserves. At present, foreign investor consensus is that the Korean won is likely to depreciate for a while, and they are dumping Korean stocks and bonds in order to avoid exchange losses. In the Korea Composite Stock Price Index (KOSPI) market, foreign investors recorded a net sale of 1.05 trillion won (US$900 million) last month, and 1.62 trillion won (US$1.39 billion) between July 1 and July 24. American investors are signaling money repatriation with an interest rate hike by the Fed around the corner, too.
Most experts predict that the rapid withdrawal that happened in 1997 and 2008 is less likely to repeat itself at this time though. “The exchange rate hike and foreign investors’ withdrawals from the stock and bond markets have begun just a month ago, and we need to wait and see if these would make a trend,” one of them explained, adding, “It seems that the won-dollar rate would not reach 1,200 won per U.S. dollar until the Fed raises the interest rate late this year.” Still, the others point out that the withdrawal of funds can be accelerated at any time, with the Korean economy’s growth rate likely to fall far short of expectations.