Korean won expected to further tumble on Brexit

[THE INVESTOR] The British pound has fallen, along with the euro, Chinese yuan and not to mention the Korean won, while the dollar and Japanese yen strengthened following the U.K.’s vote to leave the European Union.

The won-dollar exchange opened with a decrease of 0.2 won at 1,150 won last Friday, but climbed almost 30 won closing at 1,179.9 won as the British voted in favor of exiting the Union, while the KOSPI lost more than 3 percent.

Analysts forecast the won-dollar exchange to touch as high as 1,200 to 1,300 won as the global economy is expected to face turbulence with the U.K. negotiating with the EU on its departure.

“Uncertainties increased as Brexit has become a reality with the collapse of the eurozone,” said So Jae-yong, an analyst at Hana Financial Investment, in a report.

“Korea will be negatively affected by weakened consumption and slow exports to the EU.”

The analyst added that the “Leave” vote, coupled with the possibility of the U.S. Fed’s rate hike and financial instability in China, has increased uncertainty, and that the forex market would inevitably face volatility with the won-dollar exchange to hit 1,250 won in the short term.

The exchange hitting as high as 1,300 won is also another possibility as the Brexit further unfolds in the eurozone, the analyst said in a report.

As the Korean economy is expected to face growing uncertainties and risks, the political parties are voicing the need for extra spending to buffer the market from internal and external factors. 

Even though a weak won will be beneficial for exports, a rapid currency depreciation would be devastating for the country as a sudden rise in import prices with slow exports and consumption on weak global growth would affect its fundamentals.

The government could seek to devise a supplementary budget of some 20 trillion won ($17.1 billion). Finance Minister Yoo Il-ho said in a meeting with the country’s political parties, “It could come up with a plan in line with its economic policy for the second half of this year.”

Given that Korea’s global trade exposure to the U.K. is relatively low, export-dependent economies in Asia will face hardships in light of the recent event, analysts said.

“The impact of currency swings, in particular a stronger yen, are harder to judge, tightening financial conditions for emerging markets in the region,” said Frederic Neumann, head of HSBC’s Asia Economics Research.

“Still, the fragility of the West, economically as well as politically, is a reminder that Asia can‘t count on an export rebound any time soon to lift ailing growth. Reforms are urgently needed to put local demand growth on a more sustainable path.”

By Park Hyong-ki (hkp@heraldcorp.com)