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June 5, 2014 8:35 am
South Korea’s wine imports have tripled over the past 10 years but the tipple remains far more expensive than in Europe or the US – thanks in part to a local currency that many in the foreign exchange markets deem significantly undervalued.
The country’s oenophiles, and consumers of other imported goods, should be encouraged, therefore, by a rise in the won, which has appreciated 9 per cent against the US dollar over the past year and recently reached its strongest level for nearly six years.
But while the won’s rise may help cut the cost of imported goods, the impact on export competitiveness has sparked concern in the government and among some of the country’s biggest manufacturing groups. Their worries are intensified by the fall of the Japanese yen, which has depreciated against the dollar and won by 30 per cent and 34 per cent respectively over the past two years.
South Korea’s finance ministry and central bank have vowed to intervene to stave off the “herd mentality” driving the won higher, despite the US Treasury’s public expression of concern last November “at reports Korea is intervening in the market to resist appreciation”.
The authorities say their activity in the market is aimed solely at smoothing volatility, but analysts say their growing foreign exchange reserves show this intervention has consisted mostly of selling the won. According to Nomura, South Korea accumulated a net $35.8bn of foreign currency in the two years to the end of April, with reserves increasing at an average $1.8bn a month so far this year.
Yet this intervention has not prevented the won from climbing strongly over the past year. Last month it rose past Won1,050 to the US dollar for the first time since August 2008 and continued to strengthen, trading at Won1,023.5 to the greenback on Thursday.
Part of the upward pressure stems from portfolio investment from abroad. In the first four months of the year foreign investors acquired a net Won3.8tn of South Korean stocks and Won1.3tn of bonds, according to regulatory data. But analysts such as Daniel Hui, a currency strategist at JPMorgan, say a much bigger factor is South Korea’s strong exports, which reached a 15-month high in April.
“In 2010-2012, a lot of the appreciation pressure was seen as an impact of dollar weakness and speculation by foreigners. It was easier to say, we need to intervene against speculation-driven volatility, and impose macroprudential measures to stop or discourage the inflows,” Mr Hui says. “But you can’t say that corporates can’t sell the dollars from export proceeds.”
Some of the country’s leading exporters play down their concerns over the won, stressing their efforts to insulate themselves from currency movements. Hyundai Heavy Industries, the world’s biggest shipbuilder by sales, conceded that the stronger won “could be a burden”, but said the immediate impact would be small because of its extensive currency hedging.
Samsung Electronics, the world’s biggest technology company by sales, also said it was working to further diversify its currency portfolio, while carmaker Hyundai Motor said it was protecting itself by increasing overseas production and focusing increasingly on higher-margin vehicles.
Yet all these companies continue to benefit from an undervalued currency, argues Craig Chan, a currency strategist at Nomura, who points to the country’s strong current account surplus last year of $70.7bn.
While the won’s appreciation will temper this advantage, it will boost companies such as steelmakers Posco and Hyundai Steel, and food and beverage companies, which import all or nearly all of their inputs and sell mainly to the domestic market.
It will also be well received by Korean wine lovers and consumers of other foreign goods – notably of imported cars, which have been making significant gains in market share over the past year. Hanbul Motors, the local import agent for Peugeot and Citroën cars, has been taking advantage of the currency movements to cut prices.
“We are seeing more customers visiting the shop this year,” says Lee Sung-wook, a salesman at Hanbul’s dealership in the upmarket Gangnam district. “The stronger won is helping. I think further price cuts are possible.”
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