Companies Shaken by Plummeting Won Value... Emergency Over Foreign Exchange Losses [Business & Issues]

Won-Dollar Exchange Rate Surpasses 1450 Won for the First Time in 15 Years
Impact of Decline in External Credibility Since Martial Law Incident
Petrochemical, Secondary Battery, and Aviation Industries Unavoidably Hit

On the 19th, the Hana Bank Counterfeit Response Center inspected US dollar bills. On that day, the USD-KRW exchange rate in the Seoul foreign exchange market surpassed 1,450 won during trading hours, marking the highest level in 15 years since March 2009. Photo by Yonhap News

The US central bank, the Federal Reserve (Fed), hinted at slowing down the pace of interest rate cuts next year, and combined with domestic political instability such as the martial law crisis and impeachment turmoil, the won-dollar exchange rate surpassed the 1,450 won level for the first time in 15 years. As exchange rate volatility increases, companies with significant raw material imports and foreign currency debt, such as those in the petrochemical, secondary battery, and aviation industries, are facing increased performance burdens. If political instability is not resolved early, the prolonged depreciation of the won will inevitably impact food and daily necessities prices.

Won-Dollar Exchange Rate Surpasses 1,450 Won for the First Time Since 2009... Impact of Martial Law Crisis

In the Seoul foreign exchange market, the won-dollar exchange rate reached 1,453 won early on the 19th, surpassing the 1,450 won level for the first time in 15 years and 9 months since March 2009. This is the third time in history that the won-dollar exchange rate has exceeded 1,450 won, following the 1997 IMF foreign exchange crisis and the 2009 global financial crisis. The overlapping of domestic political instability after the martial law crisis and the Fed's announcement to slow the pace of rate cuts next year is seen as the cause of this adverse domestic and international situation.

The exchange rate started the year at 1,312 won and fluctuated between 1,370 and 1,380 won throughout the year, but has been on a continuous rise since recording 1,417.5 won on the 3rd, the day President Yoon Seok-yeol declared martial law. Following the rejection of the first impeachment motion on the 7th and the approval of the second impeachment motion on the 14th, the decline in external credibility due to political instability has continued, and despite government efforts to defend the exchange rate, it has not fallen below the 1,440 won level.

Even if external variables such as US interest rate policies calm down, if domestic political instability is not resolved, the won's depreciation will inevitably continue. Park Sang-hyun, a researcher at IM Securities, explained, "For the time being, domestic political risks will have a greater impact on the won-dollar exchange rate trend than external variables. While the government's market intervention may limit further increases, concerns over prolonged political instability will act as additional upward pressure on the exchange rate."

Petrochemical, Secondary Battery, and Aviation Industries Hit Hard... Concerns Over Surge in Foreign Exchange Losses

The runway of Incheon International Airport on Yeongjongdo, Incheon, on the 28th of last month. Photo by Yonhap News

The petrochemical, secondary battery, and aviation industries, which are heavily affected by the sharp rise in the exchange rate, are on alert. Companies in these sectors must hold foreign currency debt to import raw materials and maintain overseas factories and businesses, so the rise in the won-dollar exchange rate directly leads to a decrease in net profit.

Stock prices of companies have also been declining since the martial law crisis. LG Chem, a leading petrochemical company, traded at 282,500 won earlier this month but fell 8.67% to 258,000 won on the 19th. LG Energy Solution, a representative secondary battery company, recorded a stock price of 372,000 won on the 19th, down 4.98% from the beginning of the month. Korean Air, a major domestic airline, saw its stock price drop 5.26% to 25,650 won on the 19th compared to early this month.

Industry estimates suggest that if the won-dollar exchange rate rises by 10%, LG Chem will incur foreign exchange losses of approximately 591.9 billion won, LG Energy Solution 238.9 billion won, and Korean Air 400 billion won. Besides these sectors, many companies have significantly increased their foreign debt amid domestic and international political instability and anxiety, so if the won-dollar exchange rate surge continues, they will face performance pressure.

According to the Bank of Korea, as of the end of the third quarter this year, the total foreign debt of domestic companies and financial institutions stands at 429.864 billion dollars (approximately 622.615 trillion won). This is an increase of 9.752 billion dollars, or 14.1296 trillion won when converted at the current won-dollar exchange rate, compared to the end of last year. If the won's value falls further, the debt amount is expected to increase even more.

Concerns Over Delays in Economic Stimulus and Interest Rate Cuts... Food Industry Also at Risk if Prolonged

Citizens attending the impeachment rally held in front of the National Assembly in Yeouido on the 14th are cheering at the news of the passage of the second impeachment motion. Photo by Yonhap News

If the won's depreciation and the dollar's strength continue long-term, import prices for food and daily necessities will rise significantly, raising concerns about damage to the food industry as well as increased inflationary pressures. It usually takes about three months for exchange rate increases to directly affect import prices. If the won-dollar exchange rate continues to rise early next year, the overall economy will inevitably suffer greater damage.

The Producer Price Index (PPI) released by the Bank of Korea for November was 119.02, up 0.1% from the previous month, marking a reversal to an increase after four months. Industrial electricity prices rose 7.5%, pulling up other prices as well. The domestic supply price index, calculated by combining producer prices and import prices, also rose 0.6% in November compared to the previous month. This marks the second consecutive month of increase and the largest rise since a 1.0% increase in April this year. Raw materials (1.8%), intermediate goods (0.6%), and final goods (0.1%) all increased.

For some imported food raw materials, the sharp rise in exchange rates combined with increases in origin prices is expected to worsen industry difficulties. According to the Korea Agro-Fisheries & Food Trade Corporation (aT) Food Industry Statistical Information, the price of Robusta coffee rose 49.7% year-to-date to $4,843.8 per ton this month. During the same period, cocoa surged 113.4% to $9,509.4 per ton. Palm oil, used in snack and ramen production, also rose 19% to $1,089 per ton.