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Appreciation of Won Making Local Exporters Nervous
Export Competitiveness
Appreciation of Won Making Local Exporters Nervous
  • By matthew
  • October 30, 2013, 15:36
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The container port of Busan, Korea's busiest export port and the world's 5th largest as of 2012.
The container port of Busan, Korea's busiest export port and the world's 5th largest as of 2012.

 

Small-sized exporters’ concerns are rising as the strong won trend continues. Even the currency hedging products do not appear to be a viable option for them, due to the recent ruling by the Supreme Court that the knock-in knock-out (KIKO) option is not unfair. 

According to the Bank of Korea, the won lost 4.5% vis-à-vis the US dollar in just two months since September. The exchange rate was 1,110.00 won per US dollar in late August, but dropped to 1,097.90 won on September 7, continuing its downward trend to 1,086.80 won on September 9, 1,073.80 won on September 23, and 1,066.80 won on October 15. On the third-last day of this month, it closed at 1,060.60 won, 0.5 won down from the previous day. 

Under the circumstances, small-scale exporters are getting nervous. According to the Samsung Economic Research Institute (SERI), their operating profit rate is known to fall by 0.1% when the won gains 1% against the US dollar. Besides, the appreciation of the won is considered to have a more negative effect on small and mid-sized enterprises (SMEs) than large companies. Specifically, it is said that the latter’s business profit rate drops 0.094% while the former’s falls 0.139% when the won gains 1%. 

“I am planning to sign an export contract in the United States this weekend, and the exchange rate is the biggest variable for it,” said the CEO of a small chemical firm, adding, “Although some financial institutions are providing currency hedging support for SMEs, it is difficult for us to adopt such hedging products with the Supreme Court having ruled that KIKO is not unfair.”

CEO Jeong Ji-hong of Risk Hedge Technology, an exchange hedging consulting firm, predicted that there could be chaos when the 1,050 won mark is broken. “SMEs in Korea were greatly shocked when the exchange rate fell below 1,100 won per dollar,” he commented. 

To compound the matter, the majority of economists have a consensus that the strong won trend will continue for a while. “Even the government’s direct intervention in the market has its own limitations,” said Daishin Securities analyst Kim Seung-hyeon, continuing, “The intervention is likely to slow down the trend a little bit at best.”