Korean industries reeling on surging won-dollar exchange rate

Posted on : 2022-08-24 17:21 KST Modified on : 2022-08-24 17:21 KST
Coupled with increases in raw material prices, the strong dollar has left many sectors of the Korean economy with slimmer margins
A monitor in Hana Bank’s dealing room in downtown Seoul shows the won-dollar exchange rate on Aug. 22. (Kim Hye-yun/The Hankyoreh)
A monitor in Hana Bank’s dealing room in downtown Seoul shows the won-dollar exchange rate on Aug. 22. (Kim Hye-yun/The Hankyoreh)

With the won-dollar exchange rate continuing to soar, South Korea’s domestic industries are being hit hard.

Businesses are pointing out that major management-related variables have rapidly changed, raising risk management costs as well as further pushing up the price of imported raw materials, which were already high.

Although usually a surge in the won-dollar exchange rate results in stronger export competitiveness of domestic products and thus boosts exports, things don’t look as rosy this time around. This is because the Chinese yuan, the Japanese yen, and the euro have all been weakened vis-a-vis the US dollar.

“The current depreciation of the won is due to the strengthening of the dollar as a result of the hike in US interest rates, while the yuan, yen, and euro are also being affected in the same ways [as the won],” Hong Sung-wook, head of the trend analysis department at the Korea Institute for Industrial Economics and Trade, told the Hankyoreh on Tuesday.

Hong said that the current situation should be seen differently from previous similar rises in the exchange rate when the value of the won fell solely due to the sluggish South Korean economy.

As such, a stronger dollar paired with a weakened won does not automatically translate to securing stronger price competitiveness which could lead to more exports.

In terms of industries, concerns in the aviation industry, which pays for aircraft rentals in dollars and has a significant amount of foreign currency debt, appear to be high.

Based on its net liabilities denominated in a foreign currency of US$3.5 billion recorded in the first half of this year, Korean Air is reportedly suffering losses of 35 billion won (around US$26 million) for every 10-won increase of the exchange rate.

“It is burdensome because there are many foreign currency payments [that need to be made] such as plane rentals,” one official from a low-cost airline said.

The electronics industry is also not seeing the surge in the won-dollar exchange rate in a positive light.

One Samsung Electronics official said that since semiconductors, the company’s main product, are traded in dollars, its earnings are affected positively. But they added that “there are concerns about a downturn in consumer sentiment due to the sudden fluctuations of the exchange rate.”

Similarly, one official from LG Electronics also said that “the situation in which consumers' real income and their purchasing power decreases are raising even bigger concerns.” Also, an official from LG Display explained that “traditionally, a strong dollar has resulted in an increase in [Korean] exports, but recently the prices of raw materials have also increased, which is different from [situations in] the past.”

Meanwhile, the South Korean automobile industry, which has a high proportion of exports, is seeing its profits increase due to greater price competitiveness. Thanks to the effects of the rise in the won-dollar exchange rate, South Korea’s automobile exports increased by 23% in July compared to the same time one year ago.

However, car parts manufacturers that have to import raw materials are not seeing the same gains but instead are suffering more losses due to the weakened won.

“As the exchange rate rises, automakers are making big profits, but auto parts companies that import raw materials and components are likely to face a very difficult situation,” says Jung Man-ki, chairman of the Korea Automobile Manufacturers Association.

On the other hand, Korea’s steel industry is not being overly affected by the change in exchange rates.

Steel companies, such as POSCO, import raw materials such as iron ore from abroad and export steel products. According to local steel companies, the increase in costs and increase in profits due to higher exports resulting from the weakened won are balancing each other out.

“As the burden of raw material costs increases, the impact of the exchange rate [fluctuations] is not too significant because of the profits gained from exports,” one official from the Korea Iron & Steel Association explained.

Meanwhile, content-creating businesses such as gaming and webtoon companies, which record a high proportion of sales from abroad, seem to be welcoming the stronger dollar.

Game companies such as Krafton and Pearl Abyss, which rely on foreign markets for more than 80% of their sales, are highly likely to gain foreign exchange profits as a result of the current market situation.

Naver and Kakao, both of which operate webtoon platforms in the North American, European and Japanese markets, are also expected to benefit due to the rising won-dollar exchange rate.

“With overseas sales such as games and webtoons growing, we can expect even better performance in the second half of the year if we benefit from a strong dollar,” a Kakao official explained.

By Kim Young-bae, senior staff writer

Please direct questions or comments to [english@hani.co.kr]

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