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Amid persistent volatility, the South Korean won fell in value for a sixth trading day and threatened to close below the level of 1,500 won versus the U.S. dollar. In the currency market in Seoul, the won declined 1.75 percent, or 25.3 won, to close at 1,467.80 against the dollar, the lowest level in 10 years and seven months, or since April 6, 1998, when the won closed at 1,473 per the dollar.

Over the past six trading days, the won has weakened in value by 152.8 versus the dollar. Roh Sang-chil, head of the trading division at Kookmin Bank, said, “With the trading volume remaining thin at a level of US$3.4 billion, net selling by foreign investors on the stock market and currency hedging by institutional investors are still putting pressure on the currency market.”

Some small- and medium-sized companies are teetering on the verge of collapse as the won continues to weaken because of their involvement in knock-in, knock-out (KIKO) currency-hedging contracts. According to the Korea Federation of Small and Medium Businesses, things will get worse for most small- and medium-sized companies at home if the won falls to the level of 1,500 versus the dollar. Kim Tae-hwan, head of KFSMB’s trade division, said, “Companies with KIKO contracts will incur combined losses of 330 billion won (US$225 million) every time the currency falls by 100 won, so most of them will be facing bankruptcy if the won falls to the level of 1,500 versus the dollar. Other small- and medium-sized companies are grappling with the double whammy of rising raw materials prices and calls from clients to cut the price of their inventory.”

The owner of a company located in the city of Ansan, Gyeonggi Province, who is only identified by the surname Kim, is having sleepless nights these days because of damage from the KIKO contract he signed last year. He is more concerned about next year, however, when he will be required to pay double the amount of the options contract to his bank, or $300,000 a month, if the won falls further beyond the contracted range. “I’m hoping the government will initiate measures for small- and medium-sized companies, but don’t expect them to affect me much because the government budget is relatively small,” Kim said. “Then, I am more concerned about whether I will be able to manage my company next year.”

The won’s sharp decline is making things especially difficult for small- and medium-sized companies. A company in the city of Changwon, South Gyeongsang Province, is grappling with calls from clients to cut the prices of its inventory. One company official said, “As the won falls, buyers in the U.S. and Japan are asking us to cut our prices. We are delaying making any decisions, telling them we want to see what will happen in three months.”

According to a survey of 147 small- and medium-sized exporters conducted by the KFSMB, the won should be valued at 999.72 won versus the dollar and 992.9 won versus 100 Japanese yen. The won’s current value is more than 50 percent less than what they say is appropriate.

Importers and companies that export goods after importing and manufacturing raw materials are also feeling the pain. Lee Hyeon-seok, head of the economic survey division at the Korea Chamber of Commerce and Industry, said, “Given the circumstances, 1,100 won versus the dollar is seen as the Maginot Line for most companies. While there are some differences from industry to industry, the current situation is dealing a serious blow to companies that import parts or have foreign-currency loans,” Lee said.

An official at the Korea International Trade Association said, “Oil refiners will be able to withstand the pain to some extent because they can pass the burden on to consumers. But the sharp decline of the won will be more burdensome to food companies, whose wholesale prices are fixed.”

Jeong Nam-gi, a senior researcher at the Korea Small Business Institute, said, “Because small- and medium-sized companies are linked to each other, if one company experiences difficulties, those difficulties will spread to other firms in a chain reaction. Last year, most companies had set their management plans for this year at a level of 900 won versus the dollar. Now that the won is heading toward 1,500 won per dollar, they are experiencing enormous difficulties.”

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