Rising won-dollar rate threatens corporate earnings
Dollar value surpasses 1,400 won during Tuesday’s trade
The won-dollar exchange rate briefly surpassed the 1,400 won mark at one point during trade on Tuesday due to escalating global uncertainties, putting Korean businesses on high alert over potential refinancing risks and the threat of mounting foreign debt eroding future earnings.
This marks the highest level of the won-dollar exchange rate since November 2022. The exchange rate, based on closing prices, has only surpassed the 1,400 won mark on three occasions in history: during the Asian financial crisis in 1997, the global financial crisis in 2008, and the global interest rate hike shock in 2022. The sharp increase in the exchange rate raises significant concerns for Korean companies, particularly those whose foreign debts have been steadily mounting.
The upward trajectory of the exchange rate can be attributed to favorable economic conditions in the U.S. However, in recent days, this trend has intensified as geopolitical instability in the Middle East has escalated, adding further pressure on the exchange rate.
What is worrisome is the increase in external debt among Korean businesses over the past couple of years. External debt pertains to companies’ financial obligations in foreign currencies, encompassing various forms of borrowings, liabilities, or bonds, typically requiring repayment predominantly in dollars or euros.
According to the latest data from the Bank of Korea (BOK), Korea’s non-bank companies had a combined external debt of approximately $162.6 billion as of the end of last year. This marked a 5.6 percent increase compared to 2022. Corporate external debt has been rising steadily each year, reaching $142.96 billion at the end of 2021 and $154.28 billion at the end of 2022.
Short-term foreign currency debt with a maturity of one year or less totaled $16.5 billion, accounting for approximately 10 percent of corporate foreign borrowings. The remaining 90 percent of the debt is categorized as longer-term obligations, with maturities extending beyond one year.
Given that corporate external debt with longer-term maturities has been increasing annually, coupled with soaring exchange rates, the rising foreign currency debt is forecast to have a negative impact on earnings.
By company, foreign currency debt held by major players, such as SK hynix, LG Energy Solution, Asiana Airlines, and POSCO Future M amounted to 29.73 trillion won, 8.69 trillion won, 5.29 trillion won, and 928 billion won, respectively, as of the end of last year. SK hynix’s net profit could plummet by approximately 332.1 billion won if the won-dollar exchange rate was to rise by 10 percent.
Companies that rely heavily on raw material imports, such as battery manufacturers, or those with significant foreign borrowing, are expected to face the direct impact of interest rate pressure stemming from the soaring exchange rate.
Against this backdrop, the finance ministry and the central bank stepped up their verbal interventions, Tuesday, saying they are “closely monitoring the movements of the exchange rate and the supply of foreign currency with heightened caution.”