[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 the highest level in history. This was the first time that the annual average broke the 1,400-won threshold, surpassing the levels seen during the foreign exchange crisis (1,395 won) and the global financial crisis (1,276 won). Last year, the decline in the value of the Korean won stood out compared to other currencies such as the euro, pound, yuan, and yen, leading to its assessment as the weakest among major global currencies. Concerns are mounting that, as in the past, warning signs are beginning to sound for the Korean economy in response to the plummeting won.

However, if we look at whether there are any actual signs of crisis, the answer is no. South Korea's foreign exchange reserves, which serve as a buffer for defending the exchange rate, amounted to $430.6 billion. Although this falls short of the International Monetary Fund (IMF) recommended level, it remains solid. Similarly, net external financial assets, which also help defend the exchange rate, have continued to post a surplus of over $1 trillion, marking a clear difference from previous crises. The ratio of short-term external debt is also low at around 35%, and the credit default swap (CDS) premium, which signals default risk, remains stable at 21.90 basis points. Based on these indicators alone, the likelihood of facing a crisis similar to previous defaults due to an inability to repay foreign debt is extremely low. So, why is there concern?

According to the U.S. Department of the Treasury, Korea ranked first in terms of net capital inflows into the U.S. stock market by country last year, excluding tax havens such as the Caribbean and the Cayman Islands, with a net inflow of $53.2 billion from January to September. This figure surpassed that of Japan ($28.3 billion), whose economy is two to three times larger, and Singapore ($48.9 billion). This is the result of a significant increase in overseas investments by both retail investors and the National Pension Service. Despite the domestic stock market's rally toward KOSPI 5000, the prevailing judgment has been that it is better to invest abroad than in domestic assets.

The exchange rate, which forms the backbone of the national economy, directly reflects the economic conditions of both countries. Due to unstable domestic demand, soaring housing prices, and structural crises stemming from low birthrates and an aging population, Korea's potential growth rate has sunk to the 1% range. Meanwhile, the United States, with an economy 17 times larger, continues to post annual growth rates of over 2%. The interest rate reversal has persisted for more than 41 months. On top of this, expansionary fiscal policy is in play. Promising AI companies aiming to become the next OpenAI or Nvidia during the AI boom are concentrated in the U.S. With liquidity continuously being released into the market, a weakening domestic economy, and diminished expected returns from domestic assets, capital inevitably continues to flow into the United States.

In addition, export companies, which generate annual current account surpluses of over $100 billion, are accumulating the dollars they earn without exchanging them or releasing them into the market. In response to U.S.-led protectionism and global prioritization of domestic interests, these companies are dramatically increasing their overseas direct investments. By relocating production bases abroad, the profits generated overseas are not being repatriated to Korea, and according to tariff agreements, $20 billion must be remitted to the United States every year for the next 10 years. There is a widespread expectation that the value of the won will be significantly shaken due to a structural supply-demand imbalance, as demand for dollars from individuals, corporations, and institutions is converging all at once.

This kind of structural capital outflow cannot be blocked by temporary, short-term measures such as tax deferrals or calling upon the National Pension Service to hedge foreign exchange. As expectations for a high exchange rate and a preference for the dollar accelerate capital outflows and reinforce the structure in which earnings from overseas are not repatriated, warnings have emerged that the Korean economy is entering a 'Taiwan-style recession' characterized by export booms and domestic demand collapse. Ultimately, restoring trust in Korean companies and the economy is the only way to redirect investment back from the United States. Long-term measures must be pursued simultaneously—deregulating obstacles to investment and fostering a virtuous cycle in which export growth leads to increased domestic investment.

This content was produced with the assistance of AI translation services.