South Korea has had a chequered economic and forex history, while the region of the Korean peninsula has been home to several currencies since it was first brought under the unified government more than 2,000 years ago.
South Korea’s existing currency, the won, was initially launched back in 1902, during a brief period under the stewardship of the Korean empire. It was then adopted once again after WWII, when the country took the form that we recognise today.
The won is central to the success or failure of the South Korean economy, and has become increasingly important in the age of digital forex trading. But how can the currency impact positively on the economy in the wake of the Covid-19 pandemic?
A Look at the Recent Performance of the South Korean Economy
It’s fair to say that the South Korean economy currently needs a strong currency more than ever, after a period of stagnation and contraction over the course of the last 18 months.
Even before the coronavirus pandemic, dwindling exports and global trade tensions had begun to weigh heavy on South Korea’s annual growth, prompting the government to increase public spending and stimulate short-term expansion during Q4 2019.
This boosted GDP to a seasonally-adjusted level of 1.2% during this period, and while this represented the fastest quarterly expansion since 2017, it also masked the underlying issues that plagued the South Korean economy.
These issues have undoubtedly been compounded in 2020 and in the wake of the Covid-19 outbreak, with South Korea recording its most severe contraction since the 2008 financial crisis.
This impacted further on exports and consumer demand, causing the economy to contract by a whopping 1.4% in Q1 of this year. Of course, this was slightly better than the forecasts published by Reuters, but the current consensus is that things could get worse before they improve.
Can Forex Trading Stimulate the Economy?
In order to combat the socio-economic impact of the pandemic, South Korea has followed the example of other currencies by slashing their base interest rate as a way of driving quantitative easing measures.
While this makes perfect sense in the short-term, however, it also has the potential to cause a significant inflation hike and drive huge currency devaluation over time.
The latter point is particularly important, not least because a strong domestic currency can actually help the economy to grow and boost its long-term portents considerably.
Ultimately, nations with high currency values are more attractive to foreign investors and traders active on brokerage sites such as Tickmill, creating a scenario where capital flows into a country are likely to increase. This can drive public reinvestment while boosting company stocks, lifting sentiment and customer spending in the process.
Conversely, low currency values cause assets to lose their purchasing power, while encouraging overseas investors to liquidate all stocks, bonds and real estate. This is something that the South Korean government should look to avoid, particularly if they’re to avoid long-term decline and economic contraction.