soaring exchange rates and worsening exporters' profitability

 The rate of increase in the won-dollar exchange rate is very steep. The U.S. austerity, the war in Europe, and the weak yuan overlapped. China is considering lowering interest rates. Go backwards with the United States. For this reason, the won is likely to continue to weaken. This is all the more so because the U.S. will continue to push for a rate hike.

The exchange rate effect can be seen in two ways. 

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1) Positive: Increasing export competitiveness

2) Negative: Rising raw material import prices, rising dollar debt burdens.

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In the past, there were many positive aspects. However, the price of raw materials is soaring so much that it is leading to worsening profitability. It's because Korea is a country that does processing trade. In the case of aviation companies, the burden of financial costs increases due to high dollar debt.  The yen's weakness in Japan, a rival country, is also progressing. 

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'Rising exchange rates = increasing exports' is now an old saying...Companies 'super-emergency'

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Korea's Economy, May 16, 2022 at 00:53 

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The exchange rate is 1,300 won.Businesses Are 'Positive'

Profitability 'direct hit' as raw material prices jump

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Raw Material Imports Increase by 42 Trillion in Three Months

Interest on foreign currency debt is also a "snowball."

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The soaring won-dollar exchange rate is straining Korean companies. As the price of raw materials converted into won jumps, the cost burden is increasing and the pressure to repay foreign currency debt is growing at the same time.

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In the Seoul foreign exchange market, the won-dollar exchange rate rose to 1,291 won on the 13th, continuing to soar from the verge of 1,300 won. The dollar closed at 1,284-20 won against the U.S. dollar, down 4.40 won due to the government's verbal intervention, but foreign exchange experts believe the breakthrough of the 1,300 won mark is a fait accompli.

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According to the Bank of Korea on the 15th, Korea imported 95.97 billion dollars in raw materials in the first quarter of this year, up 51.9 percent (32.81 billion dollars) from 63.16 billion dollars in the first quarter of last year. During the same period, Korea's exports of major products, including semiconductors (34.86 billion dollars), automobiles (11.34 billion dollars), chemicals (26.68 billion dollars), and steel (14.8 billion dollars), easily exceeded the total amount of exports (87.68 billion dollars). The business community analyzed, "The rise in the exchange rate (falling the value of the won) is not helping the export competitiveness, but rather it is increasing the burden of imports of raw materials that have already soared, worsening the profitability of companies."

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Credit risks of some companies are also expected to emerge. As of the end of last year, Korean companies' external debts amounted to $1438.8 billion (about 183.48 trillion won. If the exchange rate rises, interest costs on foreign currency debt converted into won will increase and exchange losses will increase. Foreign exchange experts said, "As the conditions for foreign currency procurement are tight, more and more companies are having difficulty repaying foreign currency loans. The value of the won may plunge as soon as the national credit rating falls." Kim Jung-sik, an economics professor at Yonsei University, pointed out, "The trade balance has deteriorated following the fiscal balance, which is dangerous."

Trade balance deteriorates as won falls...9.86 billion won in deficit this year

The import price index jumped 35% last month...Exporting rival Japanese yen also plunges

Korean Air and Asiana Airlines financial officials, whose foreign currency debt amounted to 14 trillion won (as of the end of last year), are expressionless these days. This is because the soaring won-dollar exchange rate is on the verge of surpassing 1,300 won. It is no exaggeration to say that the performance of the two companies depends on the exchange rate. If the average exchange rate jumps 10%, Korean Air and Asiana Airlines' net profit will evaporate by 485.3 billion won and 376.1 billion won, respectively. Export manufacturers are also saddened by the rushing exchange rate. Export companies common explanation is that it is an old saying that "a fall in the value of the won leads to an increase in the trade surplus.

a growing trade deficit

According to the Seoul Foreign Exchange Brokerage on the 15th, the average won-dollar exchange rate was 1,219.32 won until the 13th of this year. Compared to last year's average exchange rate of 1,144.60 won, it rose 6.53% (74.72 won). This means that the value of the won has fallen that much.

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In the past, when the value of the won fell (the exchange rate rose), exports increased and the current account and trade account surpluses increased. A case in point is 1998, when Korea suffered from the foreign exchange crisis. At that time, the average exchange rate jumped 47.08% (447.77 won) year-on-year to 1,398.88 won, and the current account surplus reached $40.112.8 billion, the highest ever in terms of annual surplus.

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The situation was similar in 2009, right after the global financial crisis. As the average exchange rate rose 15.76% (173.81 won) year-on-year to 1,276.40 won, the current account surplus in 2009 soared to its highest level since 1998.

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But things are the opposite these days. As the value of the won falls, the trade balance is deteriorates. According to the Korea Customs Service, the trade balance (export minus imports) recorded a deficit of $9.86 billion until the 10th of this year. Compared to last year's surplus of $7.924 billion, it turned into a deficit. The current account balance in the first quarter of this year was also $15.06 billion, down 32.56 percent (7.27 billion dollars) from the first quarter of last year.

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The economics community also believes that the schematic of "rising exchange rates = favorable factors for export companies" no longer works. The report titled "Analyzing Korea's Current Account Surplus Factors" published by the Bank of Korea in November last year pointed out that "financial factors, including exchange rates, do not contribute much to the current account surplus."

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The cause is a complicated supply chain structure. In other words, the won's influence has fallen sharply as the method of importing, reprocessing, and exporting raw materials sourced from overseas has become established among domestic manufacturing companies. If the value of the won falls, you have to pay expensive money to buy raw materials. That much, performance and profitability will be undermined. As the exchange rate jumped, the import price index jumped 35% in April from a year earlier.

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On top of that, the plunge in the value of the yen in Japan, an export rival, is also affecting exports. This month, the yen's exchange rate against the dollar exceeded 130 yen for the first time since April 2002.

"Diversification of foreign currency sources"

Companies are busy preparing countermeasures related to exchange rate risks. More and more companies are subscribing to foreign exchange hedge products or increasing dollar liquidity. Airlines that pay oil costs and aircraft leases in dollars are diversifying their sources of foreign currency. The plan is to reduce the portion of strong dollar loans and increase the portion of loans such as the yen, the euro, and the won, which are showing sluggish trends.

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Chemical companies that import naphtha, the basic raw material for petrochemical products for dollars, and steel companies that import iron ore and coal, explained that they will prevent foreign exchange losses by increasing exports that receive dollars. An official from a chemical company said, "We are concerned that demand could shrink due to growing internal and external uncertainties, including fluctuations in the value of the dollar."

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Automakers with more "benefits" than "loss" are also considering adjusting their business plans. An industry official said, "We are enjoying the effect of improving performance as price competitiveness is strengthened due to the rise in the exchange rate," but added, "As there are high concerns about uncertainties in exchange rates and financial conditions, we will respond by readjusting the entire business plan."