Weak won, high oil prices and rate hike concerns weigh on Korean businesses

As the Korean won fell to its weakest level since the 2008 global financial crisis on Monday, businesses are voicing  growing concerns over the combined impact of currency volatility, elevated energy prices and the prospect of higher borrowing costs.

"Given the export-oriented nature of Korea's industrial structure, a significant portion of the impact from a weaker won can be offset by higher export earnings," an industry representative said. "However, concerns are growing as market volatility has recently increased sharply."

The dollar-won exchange rate opened at 1,555.2 won in Seoul's foreign exchange market at 9 a.m. on Monday. The opening rate marked the currency's highest level since March 6, 2009, when the exchange rate reached 1,590 won during the global financial crisis.

The Finance Ministry and Bank of Korea (BOK)  said that they will "never tolerate excessive volatility and one-sided market moves that are inconsistent with economic fundamentals and will respond forcefully" in a rare joint verbal statement issued the same day.

Although the government's statement helped moderate some of the currency's losses, the won's overall weakening trend remained intact.

For the automotive industry, where exports account for a large share of sales, a weaker won can boost earnings in the short term. Over the longer term, however, the benefits may fade.

"While a weaker won may provide a short-term boost to earnings, it could ultimately become a headwind if higher marketing costs are compounded by weakening demand," an industry insider said.

Higher import costs for key components and raw materials, including electric vehicle battery materials and steel products, could also increase production expenses.

The refining and petrochemical sectors are facing additional pressure as crude oil prices have already risen substantially during more than three months of conflict in the Middle East.

"We have reflected higher crude oil costs caused by exchange rate movements in product prices and have put hedging mechanisms in place to mitigate foreign exchange risks," a refining industry spokesperson said.

"We are broadly assessing the implications of a range of possible scenarios."

The growing possibility of an interest rate hike is also adding to the pressure.

BOK Governor Shin Hyun-song recently suggested that the central bank may "need to raise its benchmark interest rate at an appropriate time," signaling the possibility of a rate increase later this year.

Higher interest rates would increase borrowing costs for companies seeking funds for capital investment and operations, while also raising yields on corporate bond issuance.

Industry insiders worry that rising interest rates could create a vicious cycle of weaker corporate earnings, combined with inflationary pressure from higher oil and commodity prices alongside reduced consumer spending and broader economic slowdown.

Automakers are particularly concerned about declining vehicle sales as consumer sentiment weakens. Refining and petrochemical companies, meanwhile, view higher costs for refinancing and raising new funds through corporate bonds as a major challenge.

"The industry is already struggling amid ongoing restructuring, and higher interest rates would inevitably make it more difficult to secure financing," a petrochemical industry representative said. "Our biggest concern is that weakening demand will spread to downstream industries."

BY KO SUK-HYUN   [[email protected]]