[VIEWPOINT]Some hedging makes good senseThe foreign exchange rate, which had been holding steady for some time, has started moving again. The won, at 1,320 to the U.S. dollar at the beginning of the year, dropped recently to 1,180 per dollar, a decrease of nearly 12 percent.
That 12-percent increase in the value of the won means about a 14-billion won loss for a company that exports $100 million worth of goods. Korean businesses, which operate on average profit margins of only about 5.5 percent, remain vulnerable to depreciation of the won. Considering that last year's exports brought in $150.4 billion, the impact the exchange rate has on the national economy is mind-boggling.
The foreign exchange authorities were not to blame this time. The won did not rise; the dollar fell, and even massive purchases of dollars that brought our foreign exchange reserves up to $115 billion, the fourth-largest in the world, could not stabilize the exchange rate. Some people say this is nothing to worry about, especially compared to the time in the mid-1990s when the won was at 800 to the dollar. They say losses can be made up for by increased efficiency. Still others call for aggressive intervention in the market.
The common thread is that all these suggestions are based on the premise that foreign exchange rate fluctuations can be addressed by government action or by productivity improvements. Such opinions are aired every time the exchange rate moves significantly.
But the dangers that can arise from exchange rate movements these days are not the same as those of earlier years; the measures necessary are different. The root of the problem is not in our own economy but in the instability of the dollar and the tremors that instability has caused in international currency markets.
The loss of confidence in the American economy, the enormous current account deficit the United States is running and the woes in its stock markets have all been cited for the dollar's plunge. Yet there is no other currency, including the euro and the Japanese yen, which can replace the dollar as an international currency. Never has the future been so unpredictable and never have the global risks we are facing seemed so dangerous.
Of course a small, open economy is never completely free from problems involving exchange rates. But we cannot always depend on the government to "do something" or blame outside factors for our troubles. Businesses must develop aggressive strategies to neutralize these global risks themselves.
The first step would be to change the current dollar-concentrated payment system into a more diverse one. Our dependency on the Unites States for exports has dropped from 35 percent in the early 1980s to about 20 percent now. Yet the percentage that the dollar takes up in our foreign commerce has risen from 80 to 85 percent. The euro is used in only 8 percent of our transactions and the Japanese yen in only 4 percent. This structure guarantees that we will be hit every time the dollar falls.
Why should we leave the fate of our businesses in the hands of one currency only? We must diversify our settlement currencies in order to lessen our global risks. We must re-evaluate all foreign commerce, from foreign loans to the management of assets and sales. Contracts written in won terms should be considered for products which have a strong position in the market. Exchange rates always move reciprocally, so the diversification of settlement currencies would act as insurance against the dangers of the exchange rate. In particular, Korean businesses with investments in developing countries should use settlement currencies other than the domestic currencies of those countries.
A system to minimize the impact of the exchange rate on sales should also be prepared. The exchange rate difference is a routine business risk; a reserve fund should be set aside to cover any losses occurring due to exchange rate changes, but exchange rate gains should be included as ordinary profits.
One long-term strategy to decrease the dangers of exchange rate fluctuations is to internationalize the won. This is the same logic by which Europe chose to adopt the euro.
Some might criticize this strategy as "selling oneself," but others have predicted that there would be fewer than 6 currencies left in the world in 10 years. If the merits of having one's own currency are less than the demerits, why hesitate?
For now, however, if a business changes its commercial practices, it can defend millions of won in profits against changes of a few won in the exchange rate. Modern commercial practices that can minimize exchange rate risk must be adopted by businesses as soon as possible.
The writer is a professor of economics at Yonsei University.
by Jeong Kap-young