Appreciation of won could cause trillions in losses

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Appreciation of won could cause trillions in losses

As the Korean won’s continuous appreciation has raised alarms over one of the country’s key economic forces, a report released yesterday estimated that a 2 percent appreciation will likely incur a net profit loss of 2 trillion to 3 trillion won ($1.9 billion to $2.9 billion).

A report by Woori Investment and Securities estimated that the Korean companies listed on the stock markets will likely see their total net profit shrink 2 trillion to 3 trillion won if the won strengthens to an annual average of more than 2 percent against the U.S. greenback.

It said that since 2000, there have been seven occasions when the won has appreciated to that point, and as a result, listed companies saw their annual net profit shrink 2 to 3 percent.

The brokerage firm projects the combined net profits of listed companies will amount to roughly 85 trillion won at the end of this year.

Lately the won has been appreciating at the fastest pace among emerging economies. The won yesterday carried on its momentum, appreciating from 1,017.2 won against the greenback on Tuesday to 1,015.7 won.

As of yesterday, the Korean currency has strengthened nearly 3.8 percent compared to the end of last year. This rise is sharper than the 3.2 percent appreciation of the Indonesian rupiah against the U.S. greenback or the 2.5 percent appreciation of the Malaysian ringgit.

During the same period, the euro strengthened 1.1 percent against the dollar while the Thai baht appreciated 1 percent.

Foreign exchange authorities have taken a passive approach to preventing the won’s appreciation compared to in the past. Some market participants argue that the authorities are taking too big of a risk by staying on the sidelines.

The growing consensus in the market is that foreign exchange authorities will likely intervene when the won drops to 1,010 to the dollar.

The upward momentum is expected to continue and many private think tanks are revising their outlook for the won-dollar exchange to fall to 1,000 won or below.

Credit Suisse has revised its outlook for the Korean currency in the fourth quarter from 1,055 won against the dollar to 975 won while Morgan Stanley changed its outlook for the won-dollar exchange in the fourth quarter from 1,125 won to 1,000 won.

It further lowered its outlook for next year’s first half from 1,100 won in the first quarter to 980 won and 1,075 won to 960 won in the second quarter.

HSBC made a similar move, revising its outlook on the won for the next year from 1,030 won to 995 won in the first three months.

The Korea Economic Research Institute projected that if the won appreciates to 1,000 won against the dollar and the annual average strengthens 3.7 percent compared to last year’s average to 1,028.5 won, the nation’s economic growth will contract 0.21 percentage points.

That means if the Korean economy reaches the government’s target of 4 percent growth, after the currency exchange rate it would report a growth of barely under 3.8 percent at most, with export growth losing 0.46 percentage points.


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