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Low Interest Rates, Low Oil Prices, Low Won's Value
By Kim Tae-gyu
Staff Reporter
After decades of fast growth, Korea chalked up a much-hyped current account surplus in 1986 for the first time thanks in large part to a favorable situation called ``the three lows'' ― low interest rates, low oil prices and a depreciated won against the dollar.
Things are almost identical at the moment since all of the three blessings are back ― crude oil prices have plunged of late; the won is weak against the greenback; and the benchmark interest rate is at a record low.
On the surface, a three-lows era seems to be revisiting Korea, so the question is whether the period will benefit the nation as it did 20 years ago. The answer appears to be negative.
``In the late 1980s, both the local and international markets were good. Under a fully functioning economy, Korea was able to make the utmost of the three lows to leap forward,'' said Kim Young-il, an economist at the Korea Development Institute.
``Today, it is different. Of course, the three lows are good for our economy. However, they will not catapult the country sky high. They will just attenuate the difficulties to some extent,'' Lee said.
Lee Geun-tae, a senior researcher at the LG Economic Research Institute, concurs.
``Plunging oil prices and interest rates are systematic responses to an economic downturn, which takes place automatically over the economic slump to prevent a further downward spiral,'' Lee said.
``Look at the United States where the benchmark rate is zero. Oil prices are low and the dollar starts to depreciate. Then, should the U.S. be a beneficiary of the three lows?'' he asked.
Growth Potential
On the other hand, some observers see the bright spots of the three lows.
``The three lows will not work in the same way as they did in the late 1980s. The influence of the favorable factors will be limited under the lingering financial distress,'' said Lee Sun-yup, an analyst at Goodmorning Shinhan Securities.
``However, they will speed up the pace of recovery down the road when things get back on track. In that sense, they are elements that will do good to our economy later on rather than right away,'' he said.
His logic is that the three lows will not weed out financial difficulties on their own but they will combine forces to power the Korean economy into recovering at higher pace than is generally expected.
The Bank of Korea has slashed the benchmark interest rate by 2.25 percentage points over the past two months to a record low of 3 percent.
The central bank said it slashed the interest rates so drastically because inflationary pressure has subsided with the consumer price index stabilizing.
The value of the local currency has also headed down throughout this year. Although the won has appreciated a little bit this month, its value is still substantially low in comparison to last year.
The won closed at 936.1 won per dollar last year and suffered a free fall to a yearly low of 1,525 won last month. It rose of late to move between 1,300 won and 1,400 won.
This is good news for the export-oriented Korean economy where trade accounts for about two-thirds of the gross domestic product (GDP). The high won-dollar rate cuts prices of dollar-denominated products of Korean firms, thus attracting more purchases.
Crude oil prices soared to approach $140 a barrel this summer but plummeted to below $50 this month, once again good news for Korea which does not produce a drop of oil.
voc200@koreatimes.co.kr |
