Small and medium-sized enterprises (SMEs) in South Korea are reeling from a sharp rise in the won-dollar exchange rate, currently hovering above 1,460 won per dollar. The Korean won weakening against the greenback is exposing the sector’s structural vulnerabilities and reviving painful memories of past currency hedging mishaps.
Take company A, a coffee bean importer almost entirely dependent on domestic sales. With the won’s value declining against the dollar, the company’s profit margins have been falling. “Our operating margin is about 5%, but when the exchange rate rises by 10-20%, profitability takes a major hit,” said the company’s representative.
Even exporters are not spared from challenges. Company B, a manufacturer based in Chilgok-gun, North Gyeongsang Province, reported that overseas buyers have been delaying contracts and demanding price cuts, citing rising exchange rates.
“These buyers claim that a weaker won against the dollar boosts profit for exporters in Korea, so they’re demanding lower prices,” said a senior executive at the company.
The won-dollar exchange rate is nearing the 1,500 won mark, dealing a severe blow to small and medium-sized companies. The exchange rate, which stood at around 1,310 won early last year, surged past 1,400 won in December and crossed the 1,450 won mark for the first time since the global financial crisis in 2009 and the Asian financial crisis in 1997.
The won’s depreciation comes after the U.S. Federal Reserve adopted a cautious stance to rate cuts, coupled with political instability in South Korea following the Dec. 3 martial law crisis.
Korean SMEs typically import raw materials to sell directy to consumers or intermediate goods for processing. Unlike large conglomerates, which can offset rising import costs with gains from exports, smaller firms do not have the capacity to hedge currency risks.
A study by the Korea SMEs & Startups Institute (KOSI) revealed that foreign exchange risks can account for up to 25% of operating income for small and medium-sized manufacturers. The larger the company’s sales and export volumes, the greater the exposure. The study also found that for every 1% rise in the won-dollar exchange rate, exchange losses increase by 0.36%.
As cash reserves shrink as exchange rates rise, SMEs with limited resources are cutting back on labor and material investments, which could potentially lower competitiveness in the mid-to-long term, and perpetuate a vicious cycle of decline.
Currency hedging is essential to minimize exchange rate risks, but surveys show that one in two SMEs are not prepared. Even those that attempt to manage exchange risks often resort to indirect measures, such as adjusting unit prices, cutting costs, or diversifying suppliers, rather than using direct hedging tools like futures or insurance.
The reluctance to use hedging products is rooted in the lingering trauma of the 2008 KIKO crisis, severely impacting SMEs.
KIKO, or Knock-In, Knock-Out, was a derivative product marketed heavily by banks to SMEs as a hedge against currency fluctuations. But during the 2008 global financial crisis, the sudden surge in the exchange rate led to the collapse of currency derivatives contracts. An estimated 919 companies suffered combined losses exceeding 3 trillion won. Many of these companies went bankrupt or were sold off. Legal battles between affected firms and banks continue to this day.
The Ministry of SMEs and Startups recently announced a 1.5 trillion won emergency relief package for SMEs affected by rising exchange rates. The package includes subsidies for currency insurance. But critics argue that the measures are temporary fixes to prevent liquidity crises and fail to address the root causes of the problem.
Some SMEs are opting for shortening raw material import contracts. Most SMEs receive materials on credit and make payments three to six months later, but companies want to shorten payment terms as exchange rate volatility is showing no signs of subsiding.
“Shortening payment schedules might help, but this strategy is only viable for firms with sufficient cash reserves,” said an official from an SME based in Gyeonggi Province. “The reality is that there’s no effective way to shield ourselves from exchange rate risks.”
