6 out of 10 Exporting SMEs Report Profitability Deterioration Due to Exchange Rate Decline

Korea Federation of SMEs 'Survey on the Impact of Exchange Rate Decline on SMEs' Results
Appropriate Exchange Rate for SME Target Operating Profit: 1181 KRW, Break-even Exchange Rate: 1118 KRW

Due to the prolonged COVID-19 pandemic, the Korean won has remained strong, resulting in more than half of small and medium-sized enterprises experiencing a decline in profitability. Photo by Yonhap News

[Asia Economy Reporter Kim Heeyoon] Due to the prolonged COVID-19 pandemic, the continued strength of the Korean won has led to more than half of small and medium-sized enterprises (SMEs) experiencing a deterioration in profitability.

According to the Korea Federation of SMEs on the 15th, a survey titled ‘Impact of Exchange Rate Decline on SMEs’ was conducted on 308 export SMEs. The results showed that 62.3% of the companies responded that their profitability had worsened due to the recent downward trend in the exchange rate.

Compared to the time of business plan establishment, when the exchange rate falls by 10%, operating profit margins were reported to decline by △10 percentage points or more (32.3%), △7?10 percentage points (25.0%), △4?7 percentage points (25.0%), and △1?4 percentage points (17.7%) in that order, indicating that the damage caused by COVID-19 has accumulated over a long period and affected profitability.

Export SMEs responded that the appropriate exchange rate they consider suitable to achieve their business targets is 1,181 KRW per US dollar, and the breakeven won-dollar exchange rate at which they start to incur operating losses is 1,118 KRW.

As measures SMEs use to manage exchange rate risk, the survey found export price adjustment (46.8%), cost reduction (26.6%), adjustment of payment dates (13.0%), diversification of payment currencies (8.1%), subscription to exchange rate fluctuation insurance (6.2%), and subscription to forward exchange contracts (4.5%) in that order. It was also confirmed that about 3 out of 10 companies are unable to manage exchange rate risk.

Response on the impact of the recent exchange rate decline on SME exports. Table = Provided by the Korea Federation of SMEs

More than 70% of companies cited stable exchange rate management (70.8%) as the policy they most want from the government. This was followed by export-related financial and guarantee support (34.4%), expansion of exchange rate fluctuation insurance (9.7%), and support for specialized exchange rate management personnel (7.8%).

Regarding export-related difficulties, SMEs pointed out △decreased overseas demand due to the prolonged COVID-19 pandemic (75.0%), △disruption of existing buyer exchanges and difficulty in discovering new buyers due to exhibition cancellations (49.4%), △weakened price competitiveness due to exchange rate decline (33.4%), and △logistics and customs clearance difficulties due to re-lockdown measures in major export countries (23.7%).

Kim Taehwan, head of the International Trade Department at the Korea Federation of SMEs, said, “As major overseas countries implement quantitative easing policies due to COVID-19, the won’s strength is expected to continue until the end of the year,” adding, “Various support policies are urgently needed to prevent the deterioration of profitability of our export SMEs and to overcome COVID-19 and expand exports.”

This content was produced with the assistance of AI translation services.