[Urgent Survey of Top 1000 Companies] Exchange Rate 1314 Won·Interest Rate 2.8%...All 'Exceeded,' Fearful of Next Year

Akyung-Jeongyeongryeon, Survey on Business Environment of Top 1,000 Revenue Companies
Business Environment 'Worst' Due to 3 Highs
Companies Focus on 'Cost Reduction' Over 'Investment'

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[Asia Economy Reporters Moon Chaeseok and Han Yeju] The clear gap between the exchange rate, inflation, and interest rate levels that companies say they can endure and the current situation is interpreted as a factor causing companies to set conservative management plans and focus more on cost reduction rather than active investment execution. The problem lies in the anxiety that the exchange rate, inflation, and interest rates, which have already risen rapidly beyond companies' tolerance levels, may increase further.

On the 24th, Asia Economy, in collaboration with the Federation of Korean Industries, conducted an economic management environment survey targeting the top 1,000 domestic companies by sales. The exchange rate that companies said they could endure was 1,314 KRW per USD. On the 20th, the exchange rate was already at 1,433.3 KRW, surpassing the level companies can tolerate. The most common response was between 1,200 and 1,250 KRW, about 200 KRW lower than the current exchange rate.

When asked by industry, "If the exchange rate rises above an appropriate level (won depreciation), how will it affect management?" the largest group of companies (38%) expressed concern that "raw material import costs will increase, reducing profits." This pessimistic view was 11 percentage points higher than the optimistic view that "profits will increase due to improved price competitiveness in overseas markets" (27%). Generally, when the exchange rate rises, the won's value relatively decreases, benefiting export companies. However, due to the nature of Korean manufacturing, which heavily depends on raw material imports, raw material costs also increase, making it difficult for the situation to be positive.

The levels of interest rates and inflation have also exceeded the limits companies can endure. The appropriate interest rate companies said they could tolerate averages 2.8%, while the current base rate in Korea is higher at 3.0%. When asked about their response strategy if the base rate rises above an appropriate level, the most common answer (43%) was "to cover interest expenses through operating profits." This was followed by "reducing or withdrawing investment plans" (23%) and "cutting regular expenses such as labor costs" (18%), clearly showing a conservative stance focusing on cost reduction rather than investment execution.

The Bank of Korea has been boldly implementing 'big steps' by raising rates by 50 basis points (1bp = 0.01 percentage points) at a time, and the Ministry of Economy and Finance has expressed agreement with the monetary authorities' policy to curb high inflation, creating an atmosphere where the high interest rate trend is expected to continue for the time being. As interest rates rise, financing through corporate bonds and other means becomes more difficult, increasing liquidity risks for companies. Naturally, this structure inevitably puts a red light on large-scale facility investment execution.

The consumer price inflation rate soared to 5.6% based on last month's price trends announced by Statistics Korea, more than double the appropriate level of 2.4% indicated by companies. When asked how inflation above an appropriate level would affect management, the largest number of companies (41%) responded that "raw material costs will rise, worsening profitability." This was followed by expectations that "consumer purchasing power will weaken, reducing demand" (26%) and "workers' wage increase demands will rise" (20%). As inflation rises, households close their wallets, reducing product demand and shrinking corporate sales. Inventory increases, making adjustments difficult and potentially leading to production cuts.

Companies are mindful that the 'three highs' (interest rate, exchange rate, inflation) trend will continue for the time being, potentially worsening the management environment. Companies cited economic slowdown due to tightening policies such as interest rate hikes (56.4%), prolonged high inflation causing domestic demand contraction (25.6%), continued large trade deficits (12.8%), and rising raw material and component prices (5.2%) as reasons for judging that the management environment is worse than in the first half of this year.

Lee Sang-ho, head of the economic policy team at the Federation of Korean Industries, diagnosed, "As the economic recession intensifies, sales are decreasing and inventories are piling up. With interest rate hikes and sustained high exchange rates, companies' financing capacity is significantly constrained. This leads to manufacturing cost burdens, severely deteriorating productivity, resulting in a situation where there is nothing to sell, and even if they sell, there is no profit."