SME exporters vulnerable to sharp fall in the yen

The recent sharp fall in Japanese yen’s value poses a threat to local small and medium exporters to Japan, due in part to a lack of currency hedging strategy, the Korea International Trade Association said Thursday.

“SME exporters tend to be more vulnerable to currency fluctuation than conglomerates simply because local SMEs have made little investment in developing a strategy to lower risk caused by currency volatility,” a KITA official said.

“Most conglomerates have dozens of personnel who deal with currency issues, while SMEs have none or few resources in this area,” he said.

Industry watchers forecast if the value of the yen continues to fall, profitability of SMEs who export to Japan will keep falling, which could lead to a loss in sales.

According to a recent survey by the Korea Federation of Small and Medium Business, a leading lobbying group for SMEs, about 65 percent of its member firms are exposed to currency issues without a risk management strategy or action plan.

The number of SMEs to hold insurance to cover currency risk, one common tool to protect a company from foreign exchange risk, also has decreased to 369 in 2012 from 1,253 in 2008.

“One of reasons why SMEs shun foreign exchange insurance products is because damage from a currency option derivatives product called “Knock-in, Knock-out” in 2008,” the KITA official said.

In 2008, a number of local SMEs bought KIKO currency derivatives products to hedge the risk of a weak won against the dollar. However, the 2008 global credit crunch made the dollar weak against won, causing heavy losses to the KIKO buyers.

“The KIKO product is a type of insurance product to hedge risk from foreign currency. SME exporters have to raise their understanding of importance of a currency risk management plan,” the KITA official said.

The Ministry of Strategy and Finance took the impact of the strong won on SME exporters seriously as the nation’s export competitiveness could be hampered if the trend continues. As part of action plans to protect SMEs from the currency turmoil, the ministry is seeking to lower price of foreign exchange hedging insurance products for SMEs. KITA also said it supports one million won when an SME exporter buys a currency hedging insurance product.

The ministry also will provide emergency business stability funds to SMES whose export sales drop by 30 percent or more due to a currency factor compared to last year.

By Seo Jee-yeon  (jyseo@heraldcorp.com)