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CHANG Jaechul

Exports and the High Won

CHANG Jaechul

June 1, 2005

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Despite slow domestic demand, Korea's economy grew 4.6% last year, helped mostly by the export sector. Exports contributed 8.9 percentage points to GDP growth, while net export (export minus import) was 3.4 percentage points. Domestic demand, including consumption and investment, contributed just 1.5 percentage points.

Export remains a strong performer again in 2005, as monthly shipments on average run in excess of US$20 billion. It soared to a new record high of US$24 billion in March, but the pace of growth is evidently slowing, with the increase rate dropping to 21.1% year-on-year in the fourth quarter of 2004. This is 7.2 percentage points lower than the increase rate recorded in the third quarter. The main reason, of course, is the rising value of the Korean Won.

The Won's strengthening continues in 2005, further appreciating 3.3% against the US dollar, 6.9% and 8.9% against the Yen and Euro respectively, at the end of April from the start of this year. The rising value of the won is beginning to have an impact on export performance, slowing the pace of growth: exports grew a modest 12.8% in the first quarter of 2005 or 7.7% in April from a year ago.

No wonder it is weakening the price competitiveness of Korean export companies, eroding their profitability. According to Korea International Trade Association, the break-even point for average Korean export companies is about 1,066 Won per US dollar. That means most Korean exporters are losing money under the current exchange rate of around Won 1 ,000 per US dollar.

Under the present circumstances small and medium-sized exporters are most affected by exchange rate risks. Their share of exports rose just 3.9% year-on-year in the first quarter of 2005, far below their annual performance of 10.6% in 2004.

Nor was the situation bright for their big-business counterparts like Samsung Electronics, Hyundai Motor, or LGPhilips LCD, each of them exporting semiconductors, cars and LCDs. In the past, they rarely came under foreign exchange rate pressure, but in the first quarter of 2005, exporters of these items reported a plunge in operating profits or in some cases operating losses.

The Won-dollar exchange rate is expected to continue falling for some time under the weak dollar policy of the US . This could mean a further slowdown in the pace of Korea's export . Coupled with the slowing pace for the global economy as a whole, prospects for Korea's export front should not be too bright.

The US economy expanded 3.1% in the first quarter of 2005, declining for the second consecutive quarter. Moreover, it is likely to go through a soft patch (temporary recession occurring in the economic recovery phase) a bit longer than expected.

Similarly, the average growth rate of 12 European Union member countries has been revised downwards to 1.6% from the previous forecast of 2.0%. As the global economy's outlook remains cloudy, Korea's export, already buffeted by the high Won, could go through some tough times. Korea's economy, exposed to the vagaries of global trade, stands vulnerable to any abrupt changes. Every 1% drop in the growth rate of 15 Organization for Economic Cooperation and Development (OECD) member countries brings an estimated 2.4 percentage drop in Korea's export growth.

All this is bound to have negative implications for Korea's export growth in 2005. Export contribution to GDP growth will certainly shrink. In a nutshell, Korea's growth stands a good chance of further slowing down unless domestic demand recovers faster than the export front. That is far from being cheerful news. At no time is the government under heavier pressure than it is now to rev up weak demand and reignite Korea's engine of growth.

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