Seoul, South Korea – South Korea is grappling with rising inflation as the won has plummeted to a 15-year low against the US dollar, and global natural gas prices have surged to a two-year high. The confluence of these factors is raising concerns about economic instability and increasing the financial burden on state-owned energy companies.
The won-dollar exchange rate hit 1,460.30 won per dollar on December 24th, marking the first time it has surpassed the 1,460 won level this year. While it has since retreated slightly, the currency has weakened steadily since late last month, breaching the 1,400 won mark.
Analysts attribute the weakening won to several factors, including the US Federal Reserve's more cautious approach to interest rate cuts, which has strengthened the dollar. Additionally, the weakening of the Chinese yuan and Japanese yen, which often move in tandem with the won, and domestic political uncertainty have contributed to the currency's decline. The recent impeachment proceedings against acting President Han Duck-soo have heightened concerns about prolonged political instability.
Meanwhile, natural gas prices have also soared. On December 24th, US natural gas futures for January delivery closed at $3.95 per million British thermal units (Btu), the highest level since December 2022. This represents a 17% increase for the month. European natural gas prices have also surged by 18% in the past ten days.
The surge in natural gas prices is driven by expectations of a colder-than-usual winter in the US and Europe, which has increased demand for heating. While Korea Gas Corporation, the country's state-owned gas company, has long-term contracts linked to Dubai crude oil, it is not entirely immune to the impact of rising global gas prices. If the current market conditions persist, the company could face significant financial challenges due to the combined effects of a weaker won and higher gas prices.
In its latest quarterly report, the corporation warned that a 10% depreciation of the won could result in a net loss of 125 billion won. Given the substantial depreciation of the won since the third quarter, the company is likely to incur significant losses. Moreover, the company's outstanding receivables, which represent the difference between the purchase price and the selling price of gas, could swell to as much as 15 trillion won.
To reduce its outstanding receivables, the gas corporation may need to raise gas prices. However, given the current economic downturn and the recent political turmoil, the government may be hesitant to approve such a move. Alternatively, the company could increase its bond issuance to cover its losses. However, this could put upward pressure on borrowing costs for other private companies.
Moon Da-woon, a researcher at Korea Investment & Securities, expects the won to remain under pressure at least until the first quarter of next year due to the ongoing impeachment proceedings. Moreover, he believes that the structural inflationary pressures in the US economy and the underlying strength of the dollar will persist for an extended period.
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