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Rising value of the Korean won; lessons Nigeria could learn

The Korean won is currently the best-performing currency in Asia, and one of the best in the world.

The currency’s value rose by 10% against the US dollar, bouncing back from a 13-year low. Just this month alone, the won has strengthened against the dollar by 6%. It reached Won 1,020 per US dollar on Friday, its strongest since August 2008.  

Meanwhile, Geoff Kendrick, the FX strategist at Morgan Stanley, has forecast a won rally to W950/$, which would be the highest since January 2008. Its historic record level is W920/$, reached in December 2006. 

This has not been the case in the past. At times the won has been among Asia’s worst-performing currencies, especially during the region’s financial crisis in the late 1990s. So what about the Korean economy that is making the won perform so well, and what can Nigeria learn from that country? 

Foreign investments: Portfolio investment has been a major factor guiding the win. In the past week, global investors have put $588m into Korean equity funds, according to data released on Friday by EPFR, the fund flow tracker, says FT. 

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  • Bond buying has also been strong with overseas sovereign wealth funds and central banks adding billions of dollars to their Korean debt holdings this year. 
  • With economies in the West showing signs of building momentum, export-driven markets in Asia – particularly Korea and Taiwan – are also benefiting from improved demand for goods. 
  • Persistent trade surpluses in South Korea and deficits in the US kept the USD/KRW exchange rate relatively range-bound for a decade from 2010.

Poor leadership: The right investment environment, reduction in policy flip-flop, and issues surrounding the repatriation of funds in Nigeria would attract much-needed investments and foreign exchange. These would strengthen the local currency. 

The national coordinator-elect of the Independent Shareholders Association of Nigeria, Mr Moses Igbrude, told Nairametrics that the major problem with Nigeria’s currency is government policies. Igbrude said Nigeria would have no problem with the economy, except for the government. 

  • “If Nigerians can get leadership right everything will be alright,” he said. 
  • Igbrude also said Nigeria’s problem is low productivity and the country’s low productivity can be blamed on poor leadership. He said the currency would be strong if production were high, adding that by production, he did not mean Nigeria must produce everything but must focus on her comparative advantage. He stressed that Nigeria must produce more to strengthen the currency, but that it had to be driven by good leadership. 
  • Paul Nwafor, an investment analyst at Capital Assurance said investors are buying Korean bonds and increasing portfolio investment because they had confidence in the steady policies of the country, and not expecting policy somersaults from the government. He added that the Nigerian government needs to create the right environment for trade to be seamless, which would improve productivity. 
  • “It is cheaper to transport a container load of goods from Europe to America than from Lagos to Ibadan,” he said.  

Dr Felix Echekoba, lecturer in the Department of Banking and Finance, Nnamdi Azikiwe University, Awka, said so much money in circulation is chasing fewer goods in Nigeria, which is a major cause of a weak naira. He said such a situation sparks inflation and weakens the currency especially when the economy is not reeling out commensurate goods and services.  

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According to Global Exchange Hong Kong, by 2006, many won banknotes in circulation were being falsified. Counterfeiting of the 5,000-won note was such a big problem that it prompted the government to introduce a new series of banknotes with better security measures.  

Security Features: The Korean currency now includes 3D holograms that change colour and watermarks with portraits. Newly minted coins also include a substance that makes them easy to detect against counterfeit coins. 

  • In his pronouncement of the redesign of N200, N500, and N1,000 notes on October 26, the CBN governor, Godwin Emefiele, indicated that certain criminal elements own sophisticated printing machines that may have, without authorization, printed banknotes, thus creating the situation of too much money chasing few goods, which is a clear recipe for increased inflation, and by extension, a weaker currency. 
  • Moreover, with 80% of the country’s currency in circulation outside of the banking system, it makes it difficult for the monetary authority to effect appreciable defence of the naira.  

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