Beware a stronger won
Hopes are increasing for an early economic recovery in Korea. Major exporters have reported better-than-expected Q1 earnings and stocks and real estate have climbed. Optimists point to rises in the asset markets, too, plus an improvement in the real economy, such as increases in earnings of export manufacturers, as further silver linings.
Overall, it’s encouraging that Korean exporters are doing well despite the global economic slump. It is true that, thanks to these exporters, Korea is weathering the storm.
But, based purely on export indicators, it is too early to conclude that the economy has begun to recover because these improvements are mainly the result of changes in the foreign currency exchange rates.
Exporters’ earnings have improved because the won has been weak against the dollar and other currencies. The problem is that companies will suffer a setback as the won strengthens.
Accordingly, now that the local currency is showing signs of life, people are becoming more concerned about deteriorating earnings, especially for exporters of electronic goods and cars.
Thus, while business results have improved due to foreign exchange rates, they will fall because of the same.
The operating profit, or profit before tax and interest payments, of local companies listed on the benchmark Kospi will decline by 12 percent in the second quarter if the won strengthens to 1,200 won from 1,300 won per dollar, according to one study.
Some brokerage houses forecast that Samsung Electronics, the country’s biggest exporter, will see its operating profit sink by half if the won appreciates to 1,200 won per dollar. The electronics giant showed a surprise profit in the first quarter of this year. This means that better earnings and a bigger slice of the world export market is essentially an optical illusion for now.
There’s little doubt that improved earnings based on a fluctuating foreign exchange rate cannot be sustained and might even result in companies neglecting efforts to reinforce their competitiveness.
There is only one solution for local companies to survive these perilous economic cycles: get competitive. Companies should not stake their lives on currency exchange rates.
To improve their global potential, entire industries should accelerate moves toward restructuring while individual companies should not neglect efforts to save costs and develop new technologies.
Industry-wide restructuring should be promoted to remove inefficiency and bubbles. Only then will we see a clear path toward economic recovery.