Outearned, overpaying: How the weak won hurts workers, consumers

An employee presents stacks of bank notes at Hana Bank's Counterfeit Notes Response Center in Jung District, central Seoul, on Jan. 6. [YONHAP]

 
[NEWS ANALYSIS] 
 
A Korean office worker in her 40s employed at a multinational firm in Seoul recently discovered that a junior colleague at a lower pay grade who is a foreign national has been earning a comparable or perhaps even slightly higher monthly salary than her as of late.
 
The underlying reason behind this discouraging development appears to be the won’s prolonged devaluation against the dollar, as some foreign employees receive their salaries in dollars, while most domestic staff members are paid in won.
 

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“There is a significant difference in actual monthly earnings when the won-dollar exchange rate is 1,400 per dollar compared to, say, 1,200 per dollar,” she said.
 
The sharp depreciation of the local currency is becoming increasingly evident in the daily lives of Koreans, as the gradual erosion of the won’s purchasing power is affecting their routines, from shopping to refueling at gas stations.
 

 
The won closed at 1,463.2 per dollar at 3:30 p.m. Tuesday. The won-dollar exchange rate soared by 184.5 won throughout last year to close at 1,472.5 on the final regular trading day of the year, the weakest closing rate since March 13, 2009, and also the weakest year-end rate since 1997.
 
The value of the won has been in free-fall against the dollar over the past years, from a yearly average of 1,180.05 per dollar in 2020 to 1,363.98 last year.
 
 
Strong dollar spooks shoppers
 
With a stronger dollar dropping the won's value in comparison, dollar-priced products have become more expensive — ultimately steering Koreans away from imported goods.
 
One of the industries hit hardest by the global strengthening of the dollar was duty-free stores, with the combined operating losses of all four major companies in the business last year expected to come to around 200 billion won.
 
Shinsegae Duty Free decided to close its branch in Busan by Jan. 24 after winding down operations last year due to sluggish sales. Lotte Duty Free also scaled back its World Tower branch in southern Seoul, and announced recently that it will cut its transactions with professional Chinese resellers — or so-called daigong — in a desperate move to drive profitability.
 
While duty-free stores initially took a severe hit during the Covid-19 pandemic, the weak won further aggravated the situation for the already faltering industry, as they lost their competitive edge in prices compared to regular retailers in the domestic market.
 

A Lotte Duty Free branch in Jung District, central Seoul, on Jan. 12 [YONHAP]

 
The currency's depreciation also appears to have nudged some companies to hike prices at a steeper pace in Korea than in other regions.
 
Sony Interactive Entertainment raised the sticker price of its PlayStation 5 gaming console in Korea from 688,000 won to 748,000 won in October, citing “various difficulties in business driven by changes in the global economic environment.”
 
The price has been hiked twice in the country since the console's debut in 2020 — and has been upped two times in Japan as well — while its U.S. price has remained unchanged at $499 since its launch.
 
In the third quarter of last year, Korean consumers' cross-border purchases from U.S. vendors — direct purchases of goods without the involvement of local distributors — took a dip to 406.1 billion won, down 10 percent from a year earlier, according to a quarterly report from Statistics Korea published on Nov. 1. In contrast, overall cross-border purchases rose by 18.8 percent to 1.91 trillion won during the same period.
 

 
Cumulatively, Korea's cross-border purchases from the United States dropped by 8.6 percent in the January-August period from a year earlier, while total purchases from all countries increased by 22.2 percent.
 
 
Fuel prices add to woes
 
Drivers have also been sighing heavily lately, with rising oil prices adding to the strain on households already burdened with high costs of living.
 
Oil prices have been on a steady uptrend in Korea — a country highly dependent on imported fossil fuels — mainly due to the strong dollar and rising global crude prices.
 
The average price of gasoline hit 1,702.3 won per liter ($4.39 per gallon) on Monday, and 1,703.4 won on Tuesday.
 

Pictured is a gas station in Seoul on Jan. 14. Domestic gas prices exceeded 1,700 won ($1.16) per liter (0.26 gallons) for the first time in five months the same day, according to Opinet, the Korea National Oil Corporation’s price tracking system. Oil prices are expected to continue rising in the aftermath of U.S. sanctions on Russia. [YONHAP]

 
This was the first time since Aug. 10 last year that the price surpassed the threshold of 1,700 won per liter.
 
Both gasoline and diesel prices in Korea soared for the 13th consecutive week in the first week of January, from Jan. 5 to 9, according to data compiled by local oil price portal Opinet on Sunday. The weekly average gasoline price rose 15.7 won from a week prior to 1,686.07 won per liter, while diesel rose 17.2 won to 1,533.5 won.
 
Heavier fuel prices, coupled with the weak currency, translate to higher import prices, which adds inflationary pressure on the economy.
 
"If the won-dollar exchange rate continues to remain at 1,430 per dollar range, this is expected to push up consumer prices by 0.05 percentage points [in 2025]," said Bank of Korea (BOK) Gov. Rhee Chang-yong on Dec. 18, 2024.




Forex jitters may deter rate cuts
 
With the foreign exchange volatility rising even further, the BOK is expected to keep its base rate unchanged in the upcoming rate-setting meeting slated for Thursday.
 
But market participants are not ruling out the possibility of yet another 25-basis-point reduction either, after the central bank surprised the market with a rare back-to-back reduction to 3 percent in November, prioritizing growth over the weakening currency.
 
Sixty percent of bond experts, including analysts, expect the BOK’s Monetary Policy Board to hold the rate steady, according to a survey by the Korea Financial Investment Association (Kofia) released Tuesday. This marked a decline from the 83 percent of respondents with the same prediction ahead of the previous rate-setting meeting in November.
 
The remaining 40 percent forecast a 25-basis-point rate cut in January.
 
While concerns of a slowing economy persist with sluggish domestic demand, the volatile foreign exchange market remains the biggest challenge for the central bank in reducing its base rate to boost growth, especially with stronger-than-expected U.S. job growth in December.
 
"Now seems to be the time to prioritize the foreign exchange market situation, and considering the changes that occurred over the past week, we believe it would be difficult for the BOK to reduce its base rate in January," said Cho Yong-gu, an analyst at Shinyoung Securities.
 
"Though the BOK has remained more passive than expected in its currency intervention, it is unlikely to accept a won-dollar rate of 1,500 per dollar."

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]