In recent days, the South Korean won has plummeted, falling 7.05 percent at the market close on Friday last week to 1,167 won against the US dollar, compared with 1,090 won at the beginning of the year.
What is the reason behind the depreciation? At the end of 2011, the South Korean government enthusiastically embraced the idea of free-trade agreements (FTA), which it thought would provide a boost to economic growth. In reality, following the signature of FTAs with the EU in 2011, the US in 2012 and China this year, the South Korean economy has suffered a sharp decline.
In the first quarter, South Korea’s GDP growth was a mere 2.4 percent, with annual GDP falling from 3.4 to 3.1 percent. The export situation is also far from ideal. Continuing a slide of 10.9 percent in May, exports last month fell by a further 1.8 percent, making six months of continuous decline since the start of the year.
An FTA is a gamble that requires a degree of give and take. Small nations with limited resources do not normally benefit from signing FTAs with larger countries, but the agreements have already been signed: It is impossible to put the toothpaste back into the tube. How will Seoul deal with the aftermath?
The South Korean government, apart from injecting US$417.5 billion of emergency funds into the economy, could also resort to devaluation of the won to cure its economic travails. Devaluation was the weapon employed by South Korea during its 1997 financial crisis. The tactic effectively destroyed Japan’s large corporations such as Sony and Panasonic.
During the 2008 Lehman Brothers crisis, the South Korean government once again devalued its currency, and in doing so defeated its Taiwanese competitors in the panel and DRAM tech industries.
During the 1997 Southeast Asian financial crisis, the won was depreciated from a yearly average of 804 won against the US dollar to 1,404, and during the 2008 financial crisis, the won fell from 936 to 1,259 against the US dollar, a devaluation of 35 percent. Meanwhile, the value of the New Taiwan dollar remained almost unchanged. Through these devaluations, South Korea’s economic miracle was kept on track.
Seoul, reacting to its blunder in signing the FTAs, immediately turned to the double-edged sword of currency devaluation to resuscitate the economy and compensate for earlier losses. It once again demonstrated the patriotic temperament and determination of the South Koreans.
A massive devaluation of the won will probably hit Taiwan the hardest, since the two nations export similar products. The beneficiaries will be South Korea’s manufacturing companies and its stock market.
Despite South Korea’s economy performing badly, with a devaluation of its currency its stock market will remain bullish. As of Thursday last week, the South Korean stock market had fallen by 7.79 percent, measured since the start of this year. Panel manufacturing giant Samsung Electronics Co’s share price has fallen by 7.43 percent and DRAM manufacturer SK Hynix Inc’s by 18.15 percent.
The situation in Taiwan is different. Late last year, the currency was valued at NT$31.718 against the US dollar; at the market’s close last Friday, the exchange rate was NT$31.425. This demonstrates the stability of the NT dollar: a slight depreciation of 0.92 percent, compared with the 7.05 percent devaluation of the won. The exchange-rate disparity between the NT dollar is approximately 8 percent. The stock market reflects this reality.
Taiwanese panel manufacturer AU Optronics Corp’s share price has fallen approximately 34 percent this year and Innolux Corp’s by 25 percent. DRAM manufacturer Nanya Technology Corp’s share value has plummeted 60 percent and Inotera Memories Inc by 63 percent.
Overall, the Taiwanese stock market index has fallen 5.45 percent from 9,274 points at the end of last year, down to 8,767 as of Friday. Voices warning of the coming marginalization of Taiwan’s stock market are now heard in all quarters.
Government officials say that using currency devaluation to bail out the export sector is only a temporary fix and that a nation should not rely on currency manipulation as a means to become more competitive.
Furthermore, academics say that although the nation’s real effective exchange rate (REER) index increased to 105.89 points in May, it was still lower than South Korea’s 112.96 points, which demonstrates that the NT dollar is not being overvalued.
The problem is that REER statistics, compiled by the Bank for International Settlements, used 2010 as the base year. If figures from 2007 were used — prior to the Lehman Brothers crisis — the NT dollar would be overvalued by almost 20 percent compared with the won.
It seems that in the near future, a repeat of the calamity inflicted upon Taiwan’s panel and DRAM industries between 2008 and 2012 might be seen. The crucial factor is the ideological mindset and determination of officials in President Ma Ying-jeou’s (馬英九) government.
However, it should be noted that an overvalued NT dollar benefits increased investment in the Chinese economy and the wider integration of the two economies on either side of the Taiwan Strait.
Huang Tien-lin is former president and chairman of First Commercial Bank and a former Presidential Office adviser.
Translated by Edward Jones
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