June 22, 2014 1:00 am JST

Korean firms raising alarm over strengthening won

KOICHI KATO, Nikkei staff writer

SEOUL -- South Korean companies and the government are raising concerns over the continued ascent of the South Korean won.

     The won has been strengthening this month to the highest level against the dollar since the 2008 global financial crisis, surpassing the foreign exchange level deemed appropriate by a number of industries and raising concerns over the impact on the South Korean economy.

     The South Korean currency ended at 1,020.6 to the U.S. dollar on Friday in Seoul, slightly lower than the recent peak at 1,015.7 to the dollar on June 11, the highest level in about six years but still much higher than the 1,060-won range seen at the start of this year.

     The won's recent appreciation can be attributed to a growing influx of overseas capital. South Korea is seen as a safe haven among emerging economies due to its continued current account surplus, and investors are ramping up their purchases of Korean stocks, said Hong Jun-pyo, a research fellow at the Hyundai Research Institute.

     Thanks to its strong exports, South Korea's current account surplus jumped 57% on the year to $79.8 billion in 2013, the highest level on record. In the January to April period this year, it soared by 48% from a year earlier.

     Foreign investors sold about 4.2 trillion won ($4.1 billion) more Korean stocks than they purchased in the January to March period this year, but they have become net buyers of Korean shares since April. Hong expects the won to strengthen to 1,000 to the dollar at the end of this year.

     The continued won's appreciation could hit South Korean exporters, which serve as the backbone of the South Korean economy.

     Businesses saw 1,073 to the dollar as an appropriate exchange rate on average, according to a May survey of Korean exporters by the Korea International Trade Association (KITA). Plastic, rubber and textile product makers put the figure at 1,076 won, the lowest among all sectors.

     While major companies still have some room to cushion the impact due to their strong brand recognition overseas and cost competitiveness, small and midsize companies view the current won's strength as already exceeding their acceptable level. Successful firms such as Samsung Electronics are helping to boost the current account surplus, which in turn is pushing up the won against the dollar. However, this is hurting materials and smokestack industries.

     South Korean carmakers are also raising concerns about the strengthening won, as they are competing against Japanese automakers in overseas markets. The Korea Automotive Research Institute projects that a 10-won rise against the dollar would lead to a loss of 420 billion won per year for the Korean auto industry as a whole. Compared with consumer electronics firms, Korean carmakers have a higher domestic production ratio and thus are more susceptible to the impact from a higher won.

     According to a report by the Korea Exchange, 502 listed firms whose financial year ends in December saw a 1.5% drop on the year to about 25.8 trillion won combined in their group operating profit in the January-March quarter this year. Hyundai Heavy Industries and Samsung Heavy Industries slipped into operating losses due to slowing demand for shipbuilding and other factors. Chemical product prices also took a hit as Chinese companies have been ramping up their production. As a result, LG Chem and Lotte Chemical suffered double-digit operating losses during the first quarter.

     The Bank of Korea, the central bank, predicts that the nation's gross domestic product will grow by 4% in 2014, but a further appreciation of the won could raise downside risks. The Korea Economic Research Institute, a think tank affiliated with the Federation of Korean Industries, revised the assumed annual foreign exchange rate to 1,028.5 won from the initial estimate of 1,068 won to the dollar for 2014. The institute notes that the strong won's negative impact on the trade balance will outweigh positive impacts on domestic demand, such as consumption and investments, pushing down the growth rate by 0.2 percentage point.

     Alarmed by the strong won, the South Korean government has repeatedly intervened in foreign exchange markets to sell its own currency and buy the greenback. Despite criticism of currency interventions from the U.S. and other countries, the government has held firm on its stance in order to stem a further appreciation of its currency.