Korea made history as its monthly exports exceeded $100 billion for the first time. The Ministry of Trade, Industry and Energy said Tuesday that June exports surged 70.9% year-on-year to $102.25 billion. With this, Korea became the fourth country to reach $100 billion in monthly exports, following Germany, the United States and China. But it is too early to feel entirely reassured. Although there was some qualitative growth, with 18 of the top 20 major items posting export gains, the vulnerability of Korea's exports, which rely on the "single wing" of semiconductors, remained. Semiconductor exports soared 199.5%, leading the overall export strength. There are heightened concerns that the Korean economy would suffer a major blow if the semiconductor super-cycle ends around the year after next.
Persistent currency instability is also a problem that cannot be overlooked. On the same day, the won-dollar exchange rate closed at 1,554.9 won, up 5.5 won, in the Seoul foreign exchange market. Even as Korea received a remarkable export report card, the rate set a new high since the global financial crisis, following the previous day. Had foreign exchange authorities not poured in $13.6 billion to defend the currency in the first quarter of this year, it is estimated the rate would have breached 1,600 won.
The persistence of currency instability despite the authorities' active intervention is the result of a combination of factors: foreign selling of domestic stocks, the weakness of the Japanese yen, expectations of a U.S. base-rate hike, and large-scale investment plans in the United States. But fundamentally, the exchange rate reflects the market's cold assessment of the Korean economy's basic strength and future economic outlook. Not long ago, the Organization for Economic Cooperation and Development (OECD) forecast that Korea's potential growth rate next year would remain in the 1.5% range. Although forecasts continue to project that Korea's economic growth rate will reach the 3% range this year, driven by the recent semiconductor boom, this is a warning that the economy's basic strength is being depleted.
A high exchange rate leads to rising prices and base-rate hikes, placing a heavy burden on the real economy. With the Bank of Korea's base-rate hike already signaled, the government must guard against expansionary fiscal management that stimulates the exchange rate and prices, so that there is no discord between monetary and fiscal policy. In response to the era of global tightening, it must also hurry to implement preemptive financial risk management, strengthen the safety net for vulnerable groups, and restructure marginal firms. Above all, the orthodox approach is to raise the potential growth rate through labor reform and regulatory overhaul. Through this, Korea must foster new growth industries and resolve the "K-shaped" industrial polarization to achieve sustainable growth and exports.
