Weak won hits Korean companies already facing headwinds

A bank employee sorts dollar bills at Hana Bank's counterfeit response unit in central Seoul on Thursday. [NEWS1]

The weak won is pressuring businesses that are already hit hard by global economic challenges.

Airline and energy companies are suffering in particular as they make payments in dollars. Major exporters, which usually benefit from a weak won, haven't been able to make large profits from the exchange rate due to weak sales.

The local currency has been fluctuating over the past year, trading at 1,439.9 against the dollar on Sept. 28, its weakest in the past 12 months, and recovering to 1,220.3 on Feb. 2. Closing at 1,323.9 on Tuesday, it has been losing ground, lingering above the 1,300-mark since March 31.

The won has been weakening despite an overall weak dollar. The dollar index has continued to decline since peaking at 105.66 on March 8 this year. The index closed at 101.38 on Monday.

Profits of industries that feed off of exports — semiconductors, shipbuilding and automobiles — usually increase when the won weakens, whereas industries that have high foreign currency debt, such as energy and aviation, suffer losses.

The combination of the global economic slowdown and the weak local currency has become a poisonous concoction for most companies.

For Samsung Electronics, for instance, a 5 percent decrease in the won's value results in an increase in profit of 258.6 billion won ($196 million) because it sells most of its products in dollars and euros. But the chip manufacturer was unable to enjoy the benefits of the weak won as the prices of semiconductors collapsed.

Shipbuilding could not fully benefit from currency swings as companies signed forward exchange contracts (FEC) that lock in the exchange rate. HD Hyundai Heavy Industries (HHI) is under a $13.1 billion FEC that trades 1,222 won against the dollar. The contract lasts through July next year, leaving HHI missing out on "king dollar."

Energy and aviation took a direct blow from having to pay for crude oil and lease contracts in dollars. SK Innovation, the largest refiner in Korea, loses 48.8 billion won in profit if the won drops 5 percent. Korean Air Lines, sitting on 3.98 trillion won of foreign currency debt, has to pay an extra debt of 30 billion won if the exchange rate falls by 10 won.

Hyundai Motor benefited from the weak won, logging record-high earnings in the first quarter. The carmaker's profit jumps by 111.5 billion won if won weakens by 5 percent. Its profit is expected to climb by 200 billion won should the exchange rate remain in the mid-1,300s until the year-end.

Analysts say that the currency issue will remain at hand throughout the second half of this year as Korea's continued trade deficit could affect demand for won.

"A dull export outlook raises concerns on the weak demand for the won assets," Woori Bank recently said in its quarterly report, pointing out that the won may easily plunge to 1,400s if it breaks the 1,350 mark.

"Companies have to endure two 'perfect storms': the weak currency and high interest rates," Hwang Yong-sik, a professor of business at Sejong University, said, adding that businesses need to respond to the liquidity crisis while securing future assets.

BY KANG KI-HEON, HA NAM-HYUN [sohn.dongjoo@joongang.co.kr]