The Dollar and Bitcoin's Impact on the Korean Economy
Since November 7, the South Korean stock market, represented by the KOSPI index, has experienced a notable decline, plunging by 6.17% and marking its lowest point in nearly a year. This downturn is particularly alarming as it places South Korea at the bottom of the performance rankings among Asian markets. Concurrently, the South Korean won faced severe depreciation against the US dollar, with the exchange rate momentarily breaching the 1411 mark. This marks a significant moment as the last time such a level was recorded was during the IMF crisis in 1997, the global financial crisis in 2008, and the rapid interest rate hikes led by the US in 2022, emphasizing the current economic distress in the region.
In response to growing concerns over economic stagnation, the Bank of Korea made a surprising announcement regarding monetary policy. On Thursday, November 28, the central bank decided to cut its benchmark seven-day repurchase rate by 25 basis points, reducing it from 3.25% to 3.00%. This marks the second consecutive rate cut within this year and, significantly, the first time since 2009 that consecutive rate reductions have occurred.
Moreover, the Bank of Korea has also revised its economic forecasts. It lowered its expected GDP growth rates for this year and next from 2.4% and 2.1% to 2.2% and 1.9%, respectively. Additionally, the average inflation rate estimates were revised down from 2.5% and 2.1% to 2.3% and 1.9% for the next two years. Recent data indicates that South Korea’s GDP only grew by 0.1% in the third quarter, a dismal figure compared to the market expectation of 0.5%, representing the lowest growth rate observed in a year. This stagnation has been largely fueled by weak exports in critical sectors, including automotive and semiconductors.
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The rising dollar index, driven by tariff policies, has led to a depreciation of non-US currencies, making the won one of the worst-performing currencies in Asia. ING Group has projected that the won could fluctuate between 1375 and 1475 against the dollar next year, up from a previous forecast of 1350 to 1400. The trend of the dollar will significantly influence overall capital flows, and it is suggested that the won may face harsher impacts compared to other Asian currencies due to its high dependency on exports, significant trade surplus with the US, and heightened sensitivity to geopolitical tensions.
A recent survey conducted by Reuters indicated that due to uncertainties related to tariff policies, the South Korean exports are expected to see their fourth consecutive month of decline this November. Economists surveyed predicted an average export growth rate of 2.8% year-on-year for November, a decrease from October’s 4.6%. Analyst Chun Kyu-yeon from Hanwha Securities noted that non-semiconductor exports, including automotive sales to the US, are diminishing, and anticipated that demand for IT will also gradually weaken. This uncertainty surrounding the second term of the current administration has contributed to a challenging environment for domestic manufacturers.
Ironically, the surge in the price of Bitcoin has added fuel to the fire of economic woes faced by South Korea.
The phenomenon of cryptocurrency speculation in South Korea is globally recognized. In the first half of the year, the number of domestic crypto investors climbed to 7.78 million, an increase of 1.33 million compared to the latter half of the previous year. In 2017, a significant portion, about 20%, of Bitcoin trading occurred in South Korea, with peak prices exceeding international rates by 20% to 40%. The cryptocurrency market in South Korea has attracted many young investors seeking rapid wealth accumulation, yet there’s a dark side to this culture; stories of crippling debt, psychological distress, and even suicides due to crypto losses are tragically common.
Bitcoin’s recent surge, rising nearly 35%, has prompted South Korean investors to shift their focus from the stock market to Bitcoin-related assets, further exacerbating the decline in domestic small-cap stocks. The KOSDAQ index, which is heavily weighted towards small-cap stocks, has fallen by as much as 8%, putting it on track to be the worst-performing index in Asia this year.
Due to the ban on domestic brokerage firms engaging in overseas Bitcoin ETF trading, local investors have turned to leverage funds betting on Bitcoin futures, or buying shares of US companies like MicroStrategy, known for their Bitcoin investments.
Insider sources have disclosed that the transition team has interviewed prominent figures in financial regulation, including the conservative financial industry figure Paul Atkins, as a potential head for the US Securities and Exchange Commission (SEC). A staunch advocate for digital assets and fintech companies, Atkins previously testified in Congress about restructuring the agency’s operations and reducing what industry participants perceive as redundant or overly burdensome regulations. Following this news, Bitcoin surged by 6% on Wednesday, reaching an intraday high of $97,361. Ethereum also witnessed a remarkable rise of over 10%, reaching $3,671 and marking a new high since June.
Looking ahead, it appears likely that South Korea will continue to grapple with the dual pressures of the strong US dollar and escalating challenges posed by cryptocurrencies like Bitcoin for the foreseeable future.