[The Editors' Verdict]The Currency Bomb Slashing Export SMEs

Small and medium-sized export companies have little capacity to avoid the sudden blow of a high exchange rate. The only risk management option they can somewhat rely on is subscribing to foreign exchange hedging financial products, but the nightmare of the KIKO (Knock-In Knock-Out) foreign exchange derivative incident in the late 2000s still holds them back. According to the Korea Federation of SMEs, only about half of domestic export SMEs manage foreign exchange risk. Accumulating retained earnings is a story from another world. Diversifying sales channels and securing self-sustainability through restructuring essentially means giving up part of existing transactions and scraping by at a loss. Even this is difficult to attempt without cash.

According to a survey by the Small and Medium Business Research Institute, foreign exchange risk accounts for as much as 25% of the operating profit of SMEs. For those whose survival is a struggle month by month, the figure of 25% carries a meaning beyond mere numbers. Export SMEs that barely emerged from the tunnel of the COVID-19 pandemic were already facing another tunnel that might be longer and darker than the pandemic itself, due to a sharp deterioration in liquidity, increased logistics costs caused by soaring maritime freight rates, and the end of the grace period for the 52-hour workweek system. The political chaos caused by emergency decrees mercilessly dropped a 'currency bomb' on us within this tunnel, which is truly shocking.

This bomb renders even the world's ninth-largest foreign exchange reserves (as of last November) meaningless, evoking fears of a foreign exchange crisis, while harshly slashing at the most vulnerable link in the chain?the export SMEs, which are like capillaries. Do those responsible even know what they have done and where the ensuing situation is leading the country and its companies? While the whole nation is precariously balancing as if performing a tightrope act, the government's response so far has been to allocate a budget of 1.5 trillion won to support SMEs affected by the exchange rate.

In some ministries, certain functions have come to a halt to the extent that they could not even issue a recall order for senior overseas officials whose terms ended at the end of last year. It is somewhat fortunate that the budget authorities and the relevant ministries have at least managed to operate to this extent, setting policy priorities and allocating budgets. The problem is that the predictability of policy effects has decreased as much as the predictability of the foreign exchange and currency markets. Even if effects appear, they are bound to be temporary. As a result, there is reportedly a strong atmosphere of skepticism within the government itself about what and how much should and can be done.

Experts suggest that expanding currency swap agreements with major countries is urgently needed at this point, but few seem to believe that South Korea can accomplish this task now, as it requires a high degree of harmony between domestic politics and foreign affairs/diplomacy. A business leader, who is a former senior economic policy official and has also been involved in politics, recently confided to the author, "Low-level political engineering has dominated the public discourse, making policy discussions too luxurious." The reckless politics that even neutralizes the fortress of foreign exchange reserves literally kills companies and people.