[EDITORIALS]Won’s rise, export woes
With the local currency strengthening sharply against the U.S. dollar, Korea’s export companies are screaming here and there. Changes in the won-dollar rate are linked directly to the exporters’ gains and losses. When the companies exchange their dollar-denominated export earnings to the Korean currency, they lose money in proportion to the won’s appreciation.
The won rose by 4.1 percent against the American currency during 2004 and surged 11.75 percent last year. And the local currency’s value has jumped nearly 5 percent already this year. At the end of 2003, the dollar was worth about 1,200 won. Now, the dollar is worth only 960-970 won. So if a company now exports goods worth $1, the won earnings will be lower by 240 won than the won it earned in 2003. Expand that value to $10 billion, and the lost revenue amounts to 2.4 trillion won because of the currency appreciation. It is a wonder that Korean companies were able to keep on raising export volume with such a handicap.
In this situation, Korea’s exporters are deeply worried. In order to maintain their profitability, they should raise the dollar-denominated prices for their goods, or should reduce their production costs. But if they increase their price tags, they will see sales drop in the fierce price competition with foreign companies.
Seventeen of 50 large Korean exporters, including Samsung Electronics Co., Hyundai Motor Co. and LG Electronics Inc., saw sales decline last year from their 2004 levels. Their profitability is also deteriorating. If conditions at large companies are such, it goes without saying that conditions at small and medium companies are worse.
But there is no clear solution to the exporting companies’ problems right now. We cannot tell the foreign exchange authorities to intervene in the market to depress the won’s value against the dollar ― and we should not do so. There are limits to the authorities’ ability to keep the won’s value low through intervention in the market and those artificial moves will cause bad effects. The won-dollar rate depends basically on the balance of supply and demand for currencies based on exports and imports. If a nation has a higher surplus in its current account because of strong exports, it will feel upward pressure on its currency. Korea has recorded huge current account surpluses over the last eight years, so it is natural to see the dollar decline against the won.
But the appreciation has been too rapid. That is partly because of efforts in the past to suppress artificially the won’s value. Foreign exchange authorities made desperate efforts to keep the won low because exports were the only driving force for the economy during the Roh Moo-hyun administration. Finally, the authorities reached the limit of what they could do, and the dollar began to plummet.
It would be absurd if the government began again to intervene in the market to pull down the won’s value. So the best solution would be through the efforts of exporting companies themselves. Companies should develop unique technologies and stop depending too much on price competitiveness, or reduce their production costs. Companies should recognize that they cannot continue to rely on a cheap won.
Hyundai and Kia managers, for example, have frozen their salaries to overcome the negative effects of the higher won value.