[Exchange Rate Breakthrough] Even with a Full Dollar Reserve, No Reason to Smile

Possibility of Won-Dollar Exchange Rate Surpassing 1350 Won Increases
Exchange Rate Fluctuation Effects on Cash and Cash Equivalents Rise
Rising Raw Material Import Prices Pose a Burden

[Asia Economy Reporters Park Sun-mi and Han Ye-joo] As the won-dollar exchange rate is likely to surpass 1,350 won, some export companies with ample foreign currency reserves are expected to benefit in terms of cash flow. However, since the strong dollar increases the burden of raw material imports, leading to higher production costs, if consumption contracts and exports do not proceed smoothly, companies will inevitably suffer from deteriorating profitability, making it impossible to simply rejoice.

According to the industry on the 23rd, major domestic conglomerates focused on exports saw the value of foreign currency held in cash rise significantly as the exchange rate, which hovered around 1,180 won per dollar at the beginning of the year, surpassed the 1,200 won mark in June. In the case of Samsung Electronics, the cash variation due to foreign currency conversion reached 2.3495 trillion won at the end of June, tripling from 801.425 billion won a year earlier.

SK Hynix, which exports semiconductors, saw the effect of exchange rate fluctuations on cash and cash equivalents increase more than tenfold from 33.876 billion won to 446.255 billion won in the first half of the year. LG Electronics also saw a significant increase during this period, rising to 181.68 billion won from 107.849 billion won in the same period last year. With forecasts suggesting the exchange rate could exceed 1,300 won and even reach 1,400 won per dollar, companies’ foreign currency reserves are expected to grow even more robust in the second half of the year.

In the second half of the year, companies that primarily conduct transactions in dollars are also expected to continue benefiting from operating profit gains due to exchange rate differences. Notably, Samsung Electronics reported that in the second quarter, when the dollar strengthened markedly, it earned 1.3 trillion won in exchange gains on operating profit due to the rise in the value of the dollar, the main currency for semiconductor transactions.

This means the strong dollar contributed to improved earnings. SK Hynix also saw an increase of about 400 billion won in operating profit in the second quarter due to the strong dollar. In the semiconductor sector, a high proportion of export and import payments are settled in dollars, so the rise in the value of held dollars results in accounting exchange gains. Hyundai Motor and Kia, which recorded operating profits of 2.9798 trillion won and 2.2341 trillion won respectively during the same period, saw exchange rate effects of 641 billion won and 509 billion won respectively.

However, this year, concerns over demand slowdown have increased due to global inflation and the prolonged Russia-Ukraine war, making it impossible to simply celebrate. Additionally, the rising cost of imported raw materials further increases cost burdens. For example, if the price of imported raw materials is 10 dollars, and the exchange rate rises 20% from 1,000 won to 1,200 won per dollar, the actual import price the company must pay jumps from 10,000 won to 12,000 won.

If exports are strong enough to bring in dollar payments, this is not a major problem, but if exports weaken due to reduced consumption, the negative impact on profitability caused by rising production costs must be fully borne by the companies.

It is also difficult to simply raise product prices in line with rising raw material costs. Price increases lead to reduced consumer sentiment and weaken the competitiveness of domestic products, resulting in a vicious cycle of declining exports.

In particular, small and medium-sized enterprises with high import ratios of raw and subsidiary materials, the food industry, and the home appliance sector?which often settles payments in local currencies?are severely affected. Samsung Electronics expects exchange rate benefits in its parts business but anticipates some negative impacts on profitability in its DX business, which includes home appliances and mobile devices, for this reason.

According to the Korea Institute for International Trade and Commerce, if international oil prices and the won-dollar exchange rate each rise by 10%, export prices increase by 0.04%, export volumes decrease by 0.01%, resulting in only a 0.03% increase in export value. Conversely, import prices rise by 4.9%, import volumes decrease by 1.4%, leading to a 3.6% increase in import value. The institute diagnosed that "there is a high possibility this will lead to an expansion of the trade deficit."

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