Won overvalued by 10%, similar to right before 1997 crisis: seminar

The South Korean currency won is 10.2 percent higher than the equilibrium exchange rate and if the local currency keeps gaining strength in the mid-term, this could trigger another financial crisis, according to an analysis.

The analysis was made by Asia Finance Society president Oh Jung-geun at the seminar ‘Prospects and Countermeasures of Foreign Exchange Rate’ co-hosted by the Korea Economic Research Institute and Asia Finance Society held in Seoul Wednesday. Mr Oh used mid-term equilibrium exchange rate and sticky-prices currency model to reveal that the value of the won, which finished at 1,008.9 won on July 7, was overvalued by 10.2 percent compared with the equilibrium exchange rate of 1,124 won.

Mr Oh warned, “the won was overvalued compared to the equilibrium exchange rate during the pre-1997 and pre-2008 crisis,” adding “the nation faces crisis as the overvaluation of the won worsened the current account.”

The seminar also warned that the won’s rise drove down import prices and its negative overwhelms positive because it could push down exports rather than shoring up domestic consumption.

Lee Chang Seon, senior researcher at LG Economic Research Institute, explained, “sluggish consumption is largely attributed to structural problems including household debt burden and preparation for later years, so the won’s rise alone cannot be the solution to lackluster consumption.” Mr Lee added, “if the stronger won leads to rise in foreign goods imports, increased overseas travel or weakens exports, decelerating economic recovery in the end, this will serve as a negative factor for the recovery of domestic consumption.”

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