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No respite in sight for South Korean exporters

Yeouido finance district in Seoul, South Korea.
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Yeouido finance district in Seoul, South Korea.

With the won tipped to continue rising there's more pain in store for South Korean exporters, analysts say.

The South Korean won rose 9 percent against the U.S. dollar over the past 12 months and hit a fresh six-year high at the end of May. A stronger won makes Korean exports less competitive, and it's starting to show.

Exports posted their worst decline in eight months in May, latest trade data showed. Exports fell 0.9 percent on year amid waning Chinese demand, compared with April's 9 percent increase. However, analysts noted that public holidays may have distorted the figure.

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"[The stronger won] could leave exporters in a bit of bind," Shane Oliver, head of investment strategy at AMP Capital told CNBC.

"Obviously it has a negative impact if it keeps going up and it also hasn't been helped over the last year because the Japanese yen fell substantially and Korea lost competitiveness against Japan," he added, referring to the yen's 21 percent decline against the greenback in 2013.

South Korea – the world's seventh largest exporter – is home to some of the world's biggest smartphone, ship and industrial equipment makers. Exports accounted for 57 percent of South Korea's gross domestic product in 2012, World Bank data shows.

Bull run to continue

"We're positive on the won, especially against the yen," said Craig Chan, FX analyst at Nomura. "It can definitely strengthen quite significantly."

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"If you look at broad valuations... I think it's still somewhat undervalued – not by much, but we're talking about… 3.5 percent on a trade-weighted basis," he added.

Officials also believe the won is undervalued. In April, the International Monetary Fund said the won was undervalued by as much as 8 percent and warned South Korea to limit foreign exchange intervention.

Meanwhile, Jonathan Cavenagh, senior FX strategist at Westpac Institutional Bank sees the won strengthening to 995 per dollar by the end of next quarter from 1,020 currently and easing back to 1,000 by year-end.

Intervention unlikely

While a stronger won will affect exporters, Cavenagh doubts it will lead the Bank of Korea (BOK) to intervene to weaken its currency.

"Korean exporters tend to be price takers for their goods, so we suspect the bigger impact will be on profit margins. But we haven't seen a discernible impact at this stage and we don't think this will prevent dollar-won from dropping to 1,000 per dollar by year-end," he told CNBC.

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The BOK has intervened to control currency volatility in the past, but most analysts agree that it would not attempt to reverse won strength. If anything, the central bank would likely attempt to slow won appreciation.

AMP Capital's Oliver agrees: "[The BOK's] inflation rate has started to bottom out, and is now edging up, which may explain why they're reluctant to ease further."

South Korea's current account is another factor behind the won's rise. The surplus surged to a record high of $9.81 billion in April up from around $2 billion two years earlier.

"The back drop for Korea is quite strong now, particularly in terms of the current account position. So there's no reason not to expect a continued trend move higher for the won," Cavenagh added.

Contact World Economy

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