[COLUMN] Tight financial management to cope with uncertainties

Lim Chang-won Reporter Posted : 2018-04-20 10:48 Updated : 2018-04-20 10:48
글씨작게 글씨크게

Kim Kwang-seok, adjunct professor at Hanyang University's graduate school of international studies. [Aju News DB]

SEOUL -- Exports have played a role in preventing South Korea's economic downturn. After the global financial crisis, the contribution of exports has been relatively high compared to domestic consumption, but the situation has changed since 2014. While investment-led growth continues to rise and private consumption shows a moderate increase, exports are up and down.

The won's value increased as the Korean economy recovered to a considerable level and geopolitical risks were eased by an agreement on an inter-Korean summit and the summit between North Korea and the United States. Moreover, the won strengthened sharply after the Trump administration took office.

A steep decline occurred after Washington disclosed a secondary agreement on its exchange rate policy at negotiations on revising the Free Trade Agreement (FTA). A more decisive factor is U.S. suspicions that South Korean authorities are interfering with the market and manipulating exchange rates.

South Korea, China, Japan, and Taiwan are designated as the target countries for monitoring, and South Korea will be under continued pressure to appreciate its currency as Trump maintains his policy to foster manufacturing, expand exports and stimulate economic growth. There is a risk that the competitiveness of our exports will deteriorate due to increased pressure. Moreover,  there are concerns about currency conflicts involving China, the United States and Japan.

South Korea has intervened in the foreign exchange market through 'smoothing operation' when external conditions are uncertain and the exchange rate fluctuates drastically. If it is difficult to make fine adjustments, the Korean economy, which is highly dependent on foreign trade, may face risks.

There are various factors such as quality competitiveness and technological competitiveness that affect exports, but if the price of products is considered higher than their value, transactions will not be made. There is an alarm signal to our exports due to the spread of protectionism in each country and FTA renegotiations along with pressure on exchange rates. If our exports suffer a setback, companies will reduce production, leading to restructuring and an outflow of personnel that would delay South Korea's economic recovery.

Companies need to understand and respond to major risk factors that threaten exports. The international financial market is unstable, exchange rate volatility has surged, and international oil prices have changed. The U.S. benchmark rate hike and pressure on our currency will increase the volatility of macroeconomic indicators.

Companies need to consider establishing a dedicated organization to diagnose various environmental changes such as exchange rates and interest rates. Diverse macroeconomic indicators should be actively monitored. Or we should establish a collaborative system involving government, public agencies and private experts. The function of financial management such as currency hedging should be strengthened by paying attention to the possibility and timing of exchange rate fluctuation.

(This article was contributed by Kim Kwang-seok, adjunct professor at Hanyang University's graduate school of international studies.)