The Strong Dollar is Forcing Korea to Rethink Its Export Currency Rule

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(Bloomberg) — A rapid weakening of South Korea’s won is causing headaches for some of the country’s exporters who have typically benefited from a competitive exchange rate.

Asia’s fourth-largest economy is punching above its weight as a global exporter and key player in technology supply chains. However, its exports rely heavily on raw material imports, which are becoming increasingly expensive as the won weakens, while a growing offshoring trend means that dollar proceeds are not necessarily fully sent home.

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The pain is particularly great for small and medium-sized businesses that are hesitant to hedge against exchange rates but still rely on materials from overseas.

“I feel a sense of fear,” said Lee Eui-hyun, chief executive of Seoul-based Daeil Special Steel Co., a small company that trades and assembles metal parts for industrial equipment. Daeil is paying for more expensive imports as the current exchange rate weakens while it faces pressure from competitors to cut prices for its supplies, Lee said.

As the dollar continues to strengthen on weakening expectations of U.S. interest rate cuts, concerns about weak local currencies are growing across Asia. Traditionally, exporters welcome a soft currency, but there is even more cause for concern when a rapid, unexpected devaluation creates costs and complicates business planning for everyone. Japanese companies also expressed unusual unease about the weak yen.

Read: The Yen’s Continued Weakness Frustrates Even Japanese Exporters

The won has depreciated more than 5% against the dollar this year and is among the worst-performing currencies in Asia alongside Japan and Thailand. Its plunge above 1,400 in mid-April, a level not seen since late 2022, alarmed policymakers and issued a stern warning against one-sided bets.

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While larger companies like Samsung Electronics Co. are usually seen as benefiting from a weak currency because of their market dominance, the won’s recent decline to 1,400 was unexpected for them too, said Lee Sang-ho, vice president of the Federation of Korean Industries. a lobbying group that represents the country’s largest companies.

Cho Gyeong Lyeob, senior research fellow at the Korea Economic Research Institute, said corporations that borrow money abroad to expand their facilities are among the companies particularly hurting, along with steel, chemical and energy importers and airlines. “A weaker victory is more negative than positive,” he said at a seminar.

Worst actors

To be sure, South Korea’s exports have held up in recent months, rising nearly 14% year-on-year in April thanks to record demand in the United States. Inflation remains above the central bank’s 2 percent target, with a weaker won expected to accelerate price increases in the coming months.

Finance Minister Choi Sang-mok expressed concern about the won’s weakness to Treasury Secretary Janet Yellen and his Japanese counterpart Shunichi Suzuki in Washington last month, ahead of an unprecedented joint statement on the won and yen’s sharp decline.

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A notable difference between South Korea and Japan when it comes to exchange rates is how investors react to currency movements. While a weaker currency typically pushes Japanese stocks higher as their overseas earnings are expected to rise in yen, a weaker won often coincides with a fall in stock prices.

A complex combination of factors influence share price movements, but the bottom line is that higher import costs can squeeze margins while a cheaper won does little to boost exports. Investors also worry that a rapid collapse in the won could destabilize financial markets.

“It should be remembered that exporters are also importers,” said Lim Kyung-min, manager at the Korea Federation of SMEs. “Since the pandemic, prices for energy and raw materials in particular have risen.”

Any competitive advantage South Korea might enjoy from a weaker won can easily be eroded in markets where the country competes with other Asian countries moving further up the supply chain.

“Data shows no growth in South Korean exports due to a weak won,” said Lee Jung-hoon, an economist at Eugene Investment Co.

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The situation is particularly worrying for companies that lack financial protection against currency fluctuations. In a survey by the Korea Federation of SMEs in August last year – when the dollar-won exchange rate rose 3% to 1,322 – about 49% of small and medium-sized exporters said they had no specific contingency plans.

Many SMEs have refrained from entering into currency-linked derivatives since 2008, when the country’s exporters suffered losses of about $2.7 billion from contracts sold as a hedge against the won’s appreciation in the so-called KIKO crisis.

The survey also found that less than half of respondents felt the won’s devaluation was positive for their profitability, while more than a quarter said the devaluation was negative for them. While they hoped the rate would fall to 1,262 won per dollar, it is currently at 1,363.00 as of Friday’s close.

Time is running out for Daeils Lee. Further weakening of the won is likely to push up prices of both domestic and imported goods, worsening the burden on manufacturers like him.

The situation is placing increasing strain on businesses that are already struggling to maintain loan payments amid the highest borrowing costs in years.

“We have maybe six months to a year at best to hang on,” Lee said. “Beyond that, it becomes very difficult.”

– With support from Heejin Kim.

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