Won Strengthens, Export Prices Hit 36-Year Low... Red Alert on Profitability for SMEs (Comprehensive)

Bank of Korea 'November 2020 Export and Import Price Index'
Recent Won-Dollar Exchange Rate Decline... Forecasted to Reach 1140 Won Next Year
Export Companies Receiving Less Money in Won

[Image source=Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] The won-dollar exchange rate continued its downward trend, causing South Korea's export prices last month to fall to their lowest level in about 36 years. With a decline for four consecutive months, export prices are expected to drop further in the near term, which could impact the profitability of companies. The effect is anticipated to be more pronounced among small and medium-sized enterprises (SMEs) rather than large corporations, which can more easily manage exchange rate fluctuations through local production overseas or currency hedging. Despite exports performing well amid the economic downturn caused by the COVID-19 pandemic, the strengthening won means companies may receive less revenue in won terms.

According to the "November 2020 Export and Import Price Index" released by the Bank of Korea on the 16th, the export price index last month was 91.96 (2015=100), down 0.8% from the previous month. This marks the fourth consecutive month of decline, with export prices hitting their lowest point since December 1984 (91.09). Although the rate of decline in export prices narrowed compared to October (-2.6%), they fell 4.9% year-on-year, marking an 18-month downward trend.

The export price index is a measure calculated by converting export contract prices into won. While export prices based on contract currencies such as the dollar rose 1.4% month-on-month last month, reflecting the exchange rate caused a significant drop in export prices. In fact, the won-dollar exchange rate, which averaged around 1,144.68 won in October, fell 2.4% to 1,116.76 won last month. Compared to the same month last year, it decreased by 4.3%.

Following the COVID-19 outbreak, factors such as the U.S. dollar supply and the election of U.S. President Joe Biden, who promised strong stimulus measures, led to a weaker dollar. The won showed relative strength, meaning that even with the same export volume, revenue converted into won decreased. Kang Hwan-gu, head of the Price Statistics Team at the Bank of Korea's Economic Statistics Bureau, explained, "Exchange rate factors have played a significant role in the recent decline in export prices." By product category, DRAM prices fell 2.4% month-on-month, and flash memory prices dropped 4.7%. Kang added, "Due to the resurgence of COVID-19 and weak global demand, semiconductor prices declined." However, he noted, "Except for server semiconductors, whose prices fell due to increased inventory, demand for mobile and PC DRAM remains solid."

With the won's strength expected to continue, export prices are projected to keep declining. On the 3rd of this month, the won-dollar exchange rate broke below the 1,100 won level for the first time in two and a half years, closing at 1,093.3 won the previous day. As of 9:58 a.m. that day, the rate was trading at 1,090.70 won. There are forecasts that the won-dollar exchange rate could fall to 1,040 won by the first half of next year. However, the Bank of Korea believes the impact of exchange rates on export companies will be less than in the past. Reasons include increased competitiveness of Korean products, a rise in non-clearance export companies that produce overseas and export directly, and the fact that the Chinese yuan, a competitor currency, is also strengthening. Nevertheless, SMEs, which are less active in non-clearance exports or currency hedging compared to large corporations, may be more significantly affected by exchange rate fluctuations. Meanwhile, the import price index for November was 95.78, down 0.3%. Although the average Dubai crude oil price last month rose 6.8% to $43.42 per barrel, semiconductor import prices fell, marking a decline for five consecutive months.