Strong dollar forces a rethink of exports-currency rule in Korea

A rapid weakening of the South Korean won is creating headaches for some of the country’s exporters that have typically benefited from a competitive exchange rate. 

The fourth-largest economy in Asia punches above its weight as a global exporter and key player in tech supply chains. But its exports depend heavily on raw-material imports that are becoming increasingly expensive as the won weakens, while a growing offshoring trend means dollar proceeds aren’t necessarily all sent back home.

The pain is particularly acute for small and mid-sized firms that are reluctant to hedge on exchange rates but remain reliant on materials from overseas. 

“A sense of dread is creeping up on me,” said Lee Eui-hyun, chief executive officer of Seoul-based Daeil Special Steel Co., a small company that trades and assembles metal parts used in industrial equipment. Daeil pays for pricier imports as the current exchange rate weakens while it faces pressure from competitors to cut prices of its shipments, Lee said.

As the dollar continues to strengthen on the back of receding expectations of US interest-rate cuts, concerns over feeble local currencies are deepening across Asia. Exporters have traditionally welcomed a soft currency, but there’s more to worry when a rapid, unexpected depreciation incurs costs and makes business planning difficult for all. Japanese companies have also expressed unusual discomfort with the weak yen.  

The won has weakened more than 5% against the dollar this year, among the worst performers in Asia next to Japan and Thailand. Its tumble past the 1,400 mark in mid-April, a level unseen since late 2022, alarmed policymakers and drew a stern warning against one-sided bets. 

While bigger firms like Samsung Electronics Co. are typically seen as gaining from a weak currency thanks to their market dominance, the won’s recent drop to 1,400 was also unexpected for them, said Lee Sang-ho, vice president at the Federation of Korean Industries, a lobby group representing the country’s biggest companies. 

Conglomerates that are borrowing money overseas to expand facilities are among the firms suffering in particular along with steel, chemical and energy importers and airlines, according to Cho Gyeong Lyeob, senior research fellow at the Korea Economic Research Institute. “A weaker won is more negative than positive,” he said at a seminar. 

Worst Performers 

To be sure, South Korea’s exports have held up in recent months, rising nearly 14% in April from a year earlier thanks to record demand in the US. Inflation remains above the central bank’s 2% target, with expectations that a weaker won will accelerate price gains in the coming months.  

Finance Minister Choi Sang-mok aired his concerns over the won’s weakness with Treasury Secretary Janet Yellen and Japanese counterpart Shunichi Suzuki in Washington last month, ahead of an unprecedented joint statement on sharp declines in the won and the yen. 

One notable difference between South Korea and Japan on exchange rates is how investors respond to currency moves. Whereas a weaker currency typically boosts Japanese stocks on the expectations their overseas profits will rise in yen terms, a softer won has often coincided with a fall in share prices.  

A complex combination of factors feed into the stock 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 slump in the won can destabilize financial markets. 

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

Any competitive edge South Korea may enjoy from a weaker won can easily get eroded in markets where it’s competing against other Asian countries that are continuing to climb up the supply chain ladder.  

“Data don’t show any growth in South Korea’s exports due to a weak won,” said Lee Jung-hoon, an economist at Eugene Investment Co.

The situation is particularly troubling for companies that lack financial hedges against currency volatility. In a survey conducted by the Korea Federation of SMEs in August last year — when the dollar-won exchange rate jumped 3% to 1,322 — about 49% of small- and medium-sized exporters said they had no particular contingency plans.

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

The survey also said fewer than half found the won’s devaluation positive for their profitability, while more than one fourth said the depreciation was negative for them. While they hoped for the rate to come down to 1,262 won per dollar, it currently stands at 1,363.00 as of Friday’s close.

For Daeil’s Lee, time is running out. A further-extended weakening of the won will probably fuel the prices of domestic goods as well as imported ones, aggravating burdens for manufacturers like him. 

The situation is putting increasing strain on companies already struggling to keep up payments on loans amid the highest borrowing costs in years.

“We may have six months to a year at best to last,” Lee said. “Beyond that, it’s going to get so difficult.”