The Korean won has depreciated by over 5% against the US dollar this year.
In addition to the Japanese yen, the Korean won is also one of the top three Asian currencies to depreciate against the US dollar this year. The Korean won has depreciated by over 5% against the US dollar this year, making it the third worst performing currency in Asia, second only to the Japanese yen and Thai baht. In mid April, it briefly fell below the 1400 point mark, marking the first time since 2022. The South Korean government has therefore begun issuing warnings about unilateral bets on the depreciation of the Korean won.
For a long time, weak currencies have been favored by some export-oriented Asian economies, which are usually considered beneficial for domestic export enterprises to gain a competitive advantage. However, as the US dollar becomes too strong, this “iron law” is being shaken. Not only Japan, but South Korea has also recently felt that the rapid and significant depreciation of the Korean won is causing trouble for its export companies. Moreover, unlike a weak yen that benefits Japanese stocks, South Korea is also concerned about the adverse impact of a weak Korean won on its financial market.
视觉中国图
South Korean small and medium-sized enterprises have been particularly severely impacted
South Korea is the fourth largest economy in Asia, occupying an important position in the global export and technology industry supply chain. But South Korea’s exports largely rely on raw material imports, and with the significant and rapid depreciation of the Korean won, the cost of raw material imports is increasing day by day.
For South Korean small and medium-sized enterprises that rely on overseas material imports and are unable to hedge exchange rate risks, the pain caused by the rapid and significant depreciation of the Korean won is particularly significant.
Lim Kyung min, manager of the Korea Federation of SMEs, said, “We should not overlook that Korean exporters are also importers. Energy and raw material prices have been rising since the pandemic.” He added that any competitive advantage gained by Korean export companies from the depreciation of the Korean won is easily eroded in competition with other Asian countries, which are continuing to climb up the supply chain. Lee Jung hoon, an economist at investment firm Eugene Investment Co., also said, “The data shows that South Korean exports have not actually recorded any growth due to the weakness of the Korean won.”
“A sense of fear is quietly attacking me,” said Lee Eui hyun, CEO of Daeil Special Steel Co., headquartered in Seoul. The company is a small business that sells and assembles metal parts used in industrial equipment.
Not only small and medium-sized enterprises, but also Lee Sang ho, the vice president of the Korean Industry Federation, a lobbying group representing the largest enterprises in South Korea, said that although large companies such as Samsung Electronics are usually expected to profit from weak currencies due to their dominant market position, the recent drop of the Korean won to 1400 against the US dollar is also unexpected for them.
“The negative impact of the depreciation of the Korean won outweighs the positive impact.” Cho Gyeong Lyeob, a senior researcher at the Korea Economic Research Institute, stated at a seminar that Korean corporate groups, as well as Korean steel, chemical, and energy importers and Korean airlines, which are borrowing money overseas to expand their facilities, have been the most affected by the depreciation of the Korean won.
Worried about disrupting the stability of South Korean financial markets
The more tragic aspect of South Korea compared to Japan is that there are significant differences in the way investors respond to foreign exchange trends. Usually, a weakening yen will boost the Japanese stock market as the market expects an increase in Japanese overseas profits denominated in yen. However, a weakening of the Korean won often leads to a synchronous decline in the South Korean stock market. In theory, the stock price trend is the result of multiple complex factors working together. However, in the end, the increase in import costs will squeeze profit margins, and the depreciation of the Korean won will have little effect on boosting exports. Therefore, investors are also concerned that the rapid and significant depreciation of the Korean won will disrupt the stability of financial markets.
This situation is particularly concerning for South Korean companies that lack foreign exchange hedging against currency fluctuations. Last August, the South Korean Federation of Small and Medium Enterprises conducted a survey when the US dollar was located near 1322 against the Korean won. In the survey, about 49% of small and medium-sized Korean export companies stated that they have not adopted foreign exchange hedging.
In fact, since 2008, many South Korean small and medium-sized enterprises have been unwilling to hold currency linked derivatives. Because South Korean export companies lost approximately $2.7 billion in hedging against the appreciation of the Korean won during the KIKO crisis that year. The full name of the KIKO contract is “Knock in, Knock out currency option”. It is a zero cost option launched by Korean banks after 2006, mainly aimed at reducing the option premium expenses of Korean companies buying options to hedge foreign exchange risks. It was once the most popular foreign exchange option contract in the field of over-the-counter financial derivatives trading. However, the devaluation of the Korean won caused by the global financial crisis in 2008 resulted in significant economic losses for Korean companies involved in KIKO contract transactions, and some even went bankrupt as a result. The Korean court applied the principle of change of circumstances to terminate KIKO contracts, causing widespread controversy.
The above survey also shows that surveyed South Korean companies generally hope that the US dollar to Korean won exchange rate can drop to around 1262, but as of noon today, the exchange rate is still around 1368.
Lee said that there is not much time left for Korean companies. The further depreciation of the Korean won may simultaneously push up the prices of domestic and imported goods, increasing the burden on small and medium-sized export enterprises like it. Moreover, he stated that companies like him are facing the highest borrowing costs in years and are already struggling to repay their loans, putting immense pressure on them. “We may be able to sustain for up to six months to a year. Afterwards, everything will become very difficult,” he said.