Strong Won Decline Hits Korea SMEs, Exports Up 14% Amid Inflation Concerns

Key Takeaway

• South Korean exporters, especially SMEs, struggle as the won weakens over 5% against the dollar, raising import costs and squeezing margins.
• Despite a nearly 14% rise in exports in April, a weaker won is seen more negatively due to higher inflation and financial market instability concerns.
• A survey revealed that 49% of SME exporters lack contingency plans for currency volatility, highlighting the broader impact on profitability.

Currency Woes for Korean Exporters

The South Korean won's rapid depreciation has become a significant concern for the country's exporters, particularly affecting small and mid-sized firms that rely heavily on importing raw materials. The won has weakened more than 5% against the dollar this year, making it one of the worst performers in Asia. This depreciation increases the cost of imports, squeezing the profit margins of companies that cannot easily pass these costs onto their customers. Lee Eui-hyun, CEO of Daeil Special Steel Co., expressed growing concern over the rising prices for imports and competitive pressures to lower export prices.

Impact Across Sectors

The weakening won poses challenges not just for small and mid-sized enterprises but also for conglomerates and industries like steel, chemicals, energy, and airlines. While a weaker currency traditionally benefits exporters by making their goods cheaper abroad, the sudden and sharp depreciation of the won has led to increased costs and financial instability for companies. Senior research fellow Cho Gyeong Lyeob from the Korea Economic Research Institute highlighted that the negative impacts of a weaker won outweigh the positives, especially for firms borrowing money overseas or those heavily dependent on imported materials.

Government and Market Reactions

The South Korean government has expressed concern over the won's weakness, with Finance Minister Choi Sang-mok discussing the issue with international counterparts. Unlike in Japan, where a weaker yen often boosts stock prices due to increased overseas profits, a softer won tends to coincide with a fall in Korean share prices. This discrepancy reflects concerns over higher import costs and the potential for financial market destabilization. Lim Kyung-min from the Korea Federation of SMEs emphasized that exporters are also importers, facing increased costs for energy and raw materials since the pandemic.

Street Views

• Cho Gyeong Lyeob, Korea Economic Research Institute (Neutral on the South Korean economy):

  "A weaker won is more negative than positive."

• Lee Jung-hoon, Eugene Investment Co. (Neutral on the impact of a weak won on South Korean exports):

  "Data don’t show any growth in South Korea’s exports due to a weak won."

Management Quotes

• Lee Eui-hyun, CEO of Daeil Special Steel Co.:

  "A sense of dread is creeping up on me... we’re seeing that the size of Prime in the category getting smaller as we go into the fall."

• Lim Kyung-min, Manager at the Korea Federation of SMEs:

  "It should be remembered exporters are importers, too... The prices of energy and raw materials have risen in particular since the pandemic."