Korean Exporters Win with a Weaker Won

The ailing greenback is dragging down the won. That's good for Hyundai, Samsung, and LG because their Japanese rivals face a stronger yen

by Moon Ihlwan

As the shock wave from the collapse of the dollar reverberates through Asian markets, executives at South Korea's top exporters are laughing all the way to the bank. As the greenback falls, Korea's won is falling, too. And, even better for the Koreans, the Japanese yen is rising. That means companies such as Hyundai Motor, Samsung Electronics, and LG Electronics that count Japanese companies as their main rivals are set to benefit as their exports become more competitive in the world marketplace. "Earning surprises are in store for these exporters," says Park Kyung Min, chief executive at fund manager Hangaram Investment Management in Seoul.

These Korean giants relying on exports for two-thirds or more of their revenues see a reversal of their fate from the current financial turmoil. Sure, a recession in the U.S. will limit their sales growth in America, but they're hopeful that voracious demand in emerging markets, particularly in resources-rich economies, will more than

offset a slowdown in the U.S. (BusinessWeek.com, 1/30/08). After all, Korea's shipments to the U.S. dropped to 11% of the country's overall exports in January, compared to more than 20% in 2002 and 40% in 1986.

A surging yen is amplifying the effect of a falling won on Korean exporters that compete with Japanese rivals for global market share. Since the start of 2008, the won has lost some 5% of its value against the dollar, bucking the trend of major currencies that have recently appreciated. The yen, on the other hand, is up 11% this year against the dollar. The diverging swing represents a 24% decline for the Korean currency against the yen since last July, making prices of Korean exports that much cheaper against rival products made in Japan. That's a reversal of a 34% gain in the won's strength vs. the yen during an 18-month period ending in mid-2007.

Foreign Investors Dumped Korean Shares

So why is the Korean currency defying the trend of major currencies gaining strength against the dollar? The won's decline was touched off by foreign investors dumping Korean shares and bonds to secure liquidity in the face of a global credit crunch. Economist Lee Yoonsok at Korea Institute of Finance, a Seoul think tank, points out that Korea remains one of the most liquid securities markets among emerging economies, making it an easy target for foreign investors trying to secure cash in a hurry.

Those foreign investors who unloaded Korean shares sold the won to bring dollars back home. Overseas investors sold about $13 billion worth of Korean stocks so far this year, forcing the benchmark Kospi index to slide 12%. A 32% gain in the Kospi last year also allowed foreigners to take profits as they sought to secure cash.

Spurring the won's loss was the unwinding of the yen carry trade, where investors borrowed yen to put the money in higher-yielding countries such as Korea, and the reversal of currency hedging by Korean funds that had built won positions after investing in overseas stocks. As the world's equity markets are sold off, these hedges are also being unwound, according to a Morgan Stanley (MS) research report last week.

Higher Oil Prices Creates Trade Imbalance

Another driver of the won's decline: Korea's worsening current account balance, the broadest measure of trade in goods and services. The Seoul government expects Korea, which depends wholly on imports for its oil needs, to post a current account deficit of $7 billion this year against a surplus of $5.9 billion in 2007. "Given the tumult in the global financial market and high oil and commodity prices, the won won't gain strength any time soon," says Park at Hangaram Investment.

Such a prospect is sweet music to exporters.