The South Korean won-dollar exchange rate has surged to the 1,450-won range, a level not seen in 15 years, signaling that the unexpected trend of a weakening won may persist. This has put domestic companies, from small and medium enterprises (SMEs) to large conglomerates, on high alert as they scramble to devise countermeasures.
At the beginning of the year, the exchange rate hovered around 1,300 won to the dollar, fueled by optimism over potential U.S. interest rate cuts. However, it began climbing again after Donald Trump won the U.S. presidential election. The combination of S. Korea’s unstable political situation, including the declaration of martial law and the impeachment of its president, and shifts in U.S. monetary policy drove the rate above 1,451 won on Nov. 19.
A higher exchange rate means the S. Korean won has depreciated against the U.S. dollar, making the won weaker in value. This is particularly concerning for S. Korea’s trade-dependent economy, which is highly sensitive to currency fluctuations.
While a weaker won is often seen as a boon for exporters by increasing their earnings in dollar terms, many major S. Korean companies have relocated manufacturing to the U.S. This has left them more exposed to volatility, with a weaker won inflating debt burdens from large upfront investments and cutting into operating profits.
Faced with these challenges, S. Korean companies find themselves at a crossroads. Many had planned their business strategies around a 1,300-won exchange rate earlier this year but are now struggling to cope with the fallout from the sudden surge to 1,450 won, which has driven up raw material costs by at least 10%. Adding to their worries, projections that the rate could reach 1,500 won next year have sparked fears that even large corporations may find it hard to withstand the pressure.
The average operating profit margin for South Korea’s manufacturing SMEs is around 4% to 5%, according to experts. A spike to the current level could result in exchange rate losses that slash profits by up to 20% for smaller firms. A study by the Korea Institute for Industrial Economics and Trade found that a 10% increase in the exchange rate reduces operating profit margins for large companies by 0.29 percentage points. The speed and scale of the current surge have left businesses ill-prepared, and the benefits of increased revenue from a weaker won have been offset by shrinking profit margins.
In response to the unexpected currency depreciation, both large corporations and mid-sized companies are revising their business plans. Reports suggest that industries such as petrochemicals, steel, and aviation are accelerating restructuring efforts.
At an industrial parts supplier company in Uiwang, Gyeonggi-do, the recent drop in international nickel prices has been overshadowed by the skyrocketing won-dollar rate, erasing any potential gains.
“The exchange rate has soared to an unbelievable level, leaving us paying more for raw materials than when nickel prices spiked last year,” said the company’s CEO. “Our operating profit has already fallen by more than 30%, but with others reporting losses of 50%, it’s hard to find anyone to commiserate with.”
Another small business owner voiced frustration with the political instability, saying, “No matter how chaotic politics become, the government needs to stabilize the economy. Otherwise, we could see a wave of bankruptcies among small businesses.”