South Korean small and medium enterprises (SMEs) should brace for possible volatility in the currency market as economic uncertainties are growing, local observers said Tuesday.
At a meeting of the Federation of Korean Industries (FKI), analysts said that currency risks have been rising due to the U.S. Federal Reserve's tapering of its bond-buying program, slowing growth in China and the weakening of the Japanese yen, posing a threat to SMEs here.
Bae Min-keun, an economist at LG Economic Research Institute, claimed that the South Korean won is 5 percent to 7 percent "undervalued" vis-a-vis the greenback at present, and there is a real risk that the local currency may appreciate down the road, which is bad news for exporters.
"Because of such risks, it is advisable for SMEs to take advantage of exchange risk insurance or diversify their settlement currency to include the euro, which is more stable," the researcher said.
This view was largely echoed by findings made by the Korea Trade Insurance Corporation, which said that companies need to consider currency hedging if they want to safeguard profits.
"There may be considerable foreign exchange volatility, so taking precautions can ensure exporters don't lose money even if they successfully ship products abroad," the state-run corporation said.
Others with extensive experience in trading with foreign countries said SMEs are well advised to use foreign agents and liaison offices when exporting products abroad, especially if they are entering a new markets. They pointed out this does not require excessive commitments like setting up a legal corporate entity.
"This cautious approach is less costly and limits exchange rate exposure," said Kim Jin hong, a consultant for FKI business cooperation center.