EDITORIAL from the Korea Herald on Aug. 7)

Incredibly good?

Korea appears to have come out of the foreign currency crisis triggered by the
collapse of Lehman Brothers in September last year. Its foreign exchange
reserves, which rose to a 10-month high in July, are most likely to exceed what
the government regards as an appropriate level by year-end.

The turnaround is nothing short of amazing, given that the Korean government had
to go cap in hand to Washington and other capitals to conclude currency swap
deals that would forestall a post-Lehman financial meltdown. Better still, the
growing reserves are not the only sign of a fast economic recovery.
Consumer prices are stable. The won is strengthening. Exports are regaining
vitality. And the current account records surpluses month after month. No wonder
the stock market has turned bullish. One of the few exceptions is the bleak job
market.
The government, corporations and households should keep themselves from being
blinded by all these developments, which appear to be unbelievably good. Pitfalls
still lie on the path to a full recovery.
One case in point is the consumer price index. In July, it gained a mere 1.6
percent from a year ago, the lowest since May 2000. But the incredibly low rate
of inflation should not fool any of the economic players. If no action is taken,
it is only a matter of time before inflationary pressure surges.
It is a fundamental economic principle that consumer prices rise as liquidity
increases, all other things being equal. At the moment, inflation is being held
in check, even though the market is awash with liquidity, with the central bank's
benchmark rate standing at a historic low of 2 percent.
But inflationary pressure will build up once consumers start to open their purses
and businesses begin to invest in earnest. Then the central bank will have to
tighten the credit spigot. It goes without saying that timing is critical here.
It should come as no surprise if the central bank starts to siphon off excess
liquidity in the not-too-distant future.
As the state coffers are bulging with foreign exchange reserves, Korea has now
regained its pre-crisis creditworthiness in the global financial markets. The
reserves, which totaled $237.5 billion at the end of July, will expand to $260
billion at the end of the year, according to reports from economic think tanks.
The amount will be larger if the central bank buys U.S. dollars from the market
to moderate the strengthening of the Korean currency.
The exchange rate, which peaked at 1,573 won per dollar on March 3, now hovers
around the 1,220 won level. The Korean won is gaining as the nation's
revitalizing exports contribute to current account surpluses.
Economic think tanks agree with financial institutions that the won is still
undervalued and that it will continue to strengthen in the months ahead. Among
them is Goldman Sachs, which predicts the Korean currency will strengthen to
1,150 won per dollar a year from now.
That spells hardship for Korean corporations, which have boosted exports with the
help of a weak won. The exporters will have to cut costs, improve quality and
upgrade their products if they are to survive the won's steep appreciation.
The government and the central bank are well advised to guard against the
temptations to moderate the won's rise against the dollar by intervening in the
foreign exchange markets. It will do more good than harm to the nation's economy
if marginal exporting companies that are over dependent on a weak won are forced
out of the market.
Another benefit to be gained from the won's rise is that it helps to lower import
bills and, by doing so, stabilizes consumer prices.
(END)