[Exchange Rate 1400 Won] Increased Burden of Imported Raw Materials Hits Companies... Further Stock Market Decline Inevitable

, Won-Dollar Exchange Rate Expected to Rise to an Average of 1434 Won Next Month
Experts Say "Cost Burden from Exchange Rate Will Offset Export Growth"

[Asia Economy Reporters Sunmi Park and Junho Hwang] Following the U.S. Federal Reserve's giant step of raising the benchmark interest rate by 0.75 percentage points, the won-dollar exchange rate surpassed 1,400 won on the 22nd, raising concerns that the cost burden on domestic companies will increase further. In particular, with forecasts suggesting the won-dollar exchange rate could rise to 1,434 won next month, the possibility of rapid withdrawal of foreign investment from the domestic stock market has increased. On the same day, the stock market also weakened, with the KOSPI falling more than 1%, and most of the top market capitalization stocks failing to avoid weakness.

The Korea Economic Research Institute analyzed the "Impact of Changes in the Korea-U.S. Benchmark Interest Rate Differential on the Exchange Rate," forecasting that even if the Bank of Korea's Monetary Policy Committee adopts a baby step (0.25 percentage point increase) or a big step (0.5 percentage point increase) in October, the benchmark interest rate gap between Korea and the U.S. will remain between 0.125 and 0.375 percentage points, and the phenomenon of benchmark interest rate inversion will continue for the time being. Accordingly, the exchange rate, which surged from 1,202.4 won per dollar at the beginning of the year to 1,347.5 won in August, is likely to rise further. The rise in the exchange rate could become even steeper.

If the Bank of Korea raises the benchmark interest rate by 0.25 percentage points, the exchange rate increase rate in October is expected to accelerate to 22.4% year-on-year, with the won-dollar exchange rate estimated to rise further to 1,434.2 won. Even if the benchmark interest rate is raised by 0.5 percentage points, the gap in the rate hike between Korea and the U.S. will still widen by 0.75 percentage points, pushing the exchange rate up to 1,409.6 won. This indicates that the won-dollar exchange rate will inevitably move above 1,400 won for the time being.

As the exchange rate rise steepens, damage to domestic companies has become inevitable. According to a survey conducted by the Federation of Korean Industries on the 15 heads of research centers at securities firms the previous day, when asked about the impact on companies if the high exchange rate persists, two-thirds (66.7%) of experts analyzed that "the cost burden caused by the exchange rate, such as rising raw material prices, will offset export growth." The response that "the cost burden is greater" was also high at 26.7%. Only 6.7% said it would "help increase exports and profits."

By industry, airlines, which must pay fuel costs and aircraft lease fees in dollars, faced a significant burden due to the high exchange rate. In the case of Korean Air, a 10 won fluctuation in the exchange rate results in about 35 billion won in foreign currency valuation gains or losses. If the exchange rate rises from 1,200 won to 1,300 won, it means a book loss of 350 billion won. The steel industry, which has a higher import ratio than exports, also faced increased raw material import costs, and the refining industry, which issues many dollar-denominated bonds, saw an increase in the amount of money to be repaid.

Choo Kwang-ho, head of economic policy at the Korea Economic Research Institute, said, "Recently, the private sector's financial resilience has weakened, making it difficult for the Bank of Korea to follow the U.S.'s aggressive interest rate hikes," adding, "To ease the exchange rate rise pressure caused by the inversion of benchmark interest rates between Korea and the U.S., urgent measures to stabilize the foreign exchange market focusing on trade balance management, such as enhancing corporate export competitiveness and resolving raw material supply difficulties, must be prepared."

The domestic securities market also weakened. At the opening on the same day, the KOSPI fell more than 1%, giving up the 2,320 level. Samsung Electronics fell to 54,500 won, setting a new 52-week low, and most of the top market capitalization stocks failed to avoid weakness. The KOSDAQ index also fell more than 1.6%, threatening the 740 level.

Experts also appeared to give up hope for a market turnaround. Lee Kyung-min, a researcher at Daishin Securities, said, "The medium- to long-term trend of the global stock market, including the KOSPI, has become clear," adding, "It has been reconfirmed that the market will inevitably suffer for a considerable period from the double burden of high-intensity tightening, expanded global economic uncertainty, and weakening economic momentum." He suggested the 2,050 level as the bottom for the KOSPI during this downward trend.

Concerns about further declines also emerged. Kim Jun-young, a researcher at Heungkuk Securities, explained, "Although Chairman Powell's press conference was uneventful, the U.S. stock market widened its decline," adding, "Before the stock market reflects the final benchmark interest rate forecast of 4.25?4.50% that emerged after last week's U.S. Consumer Price Index (CPI) announcement, a new forecast has appeared, leaving room for further declines in the stock market."