Exchange Rate Surge and BSI Shock... Companies Fear 'Perfect Storm'

Domestic and International Uncertainty... Worsening Business Environment

Won-Dollar Surpasses 1460... BSI Negative for 34 Consecutive Months

70% of Companies "Labor-Management Relations Unstable"... Consumer Sentiment Rapidly Shrinking

< 'Uncertain Financial Market' ></p><p> The impeachment situation is causing exchange rates to rise and domestic demand to stagnate, raising concerns about the business environment for companies. On the 26th, the dealing room status board at Hana Bank's main branch in Euljiro, Seoul, shows the won-dollar exchange rate surpassing 1460 and the stock index declining. /Reporter Kim Beom-jun

There are growing forecasts that the business environment for companies will significantly worsen next year. This is due to increased uncertainty from the impeachment situation and the opening of the 'Trump 2.0 era', rising won-dollar exchange rates, accelerated domestic demand stagnation, intensified labor-management conflicts, and the pursuit by China. Concerns are being raised that unless the political and government sectors take bold steps to ease regulations and provide tax benefits to 'revitalize corporate spirit', the growth engine of the Korean economy will quickly cool.

According to a survey conducted by the Korea Economic Research Institute on the 26th on the top 600 large companies by sales, the Business Survey Index (BSI) forecast for January next year is 84.6, falling below 100 for 34 consecutive months since April 2022. This is the longest record since the survey began in January 1975. A BSI below 100 means that the economy is expected to worsen compared to the previous month. The decline (12.7 points) compared to the previous month is the largest in 4 years and 9 months since April 2020 (-25.1 points) when COVID-19 began to take hold.

Small and medium-sized enterprises (SMEs) are also pessimistic about the economy. According to the Business Outlook Index (SBHI) survey conducted by the Korea Federation of SMEs on 3,071 SMEs, the SBHI for January next year is 68.1 (baseline 100), down 4.5 points from this month.

Companies cited factors such as increased costs for purchasing materials and parts due to high exchange rates, accelerated domestic demand stagnation, worsening trade conditions due to tariff increases in the Trump 2.0 era, potential intensification of labor-management conflicts, and the pursuit by Chinese companies as reasons for the economic downturn. On this day, the won-dollar exchange rate (as of 3:30 PM) was 1464.80 won, the highest in 15 years and 9 months since March 2009 during the global financial crisis. When the exchange rate rises, the cost of purchasing parts for domestic companies increases, but due to intense competition, they cannot reflect this in prices.

Consumer sentiment is expected to freeze further. In a survey conducted by the Korea Chamber of Commerce and Industry on 300 retail companies, 66.3% predicted that the retail market next year would be worse than this year. Labor-management conflicts are expected to intensify. According to a survey conducted by the Korea Employers Federation on 150 companies, 69.3% predicted that labor-management relations would be more unstable than this year.

High Exchange Rates, Domestic Demand Stagnation, Labor-Management Conflicts... "Can't See Ahead" Both Large and Small Companies in Uproar

Worst Economic Outlook in 5 Years... "Worse Business Environment than During the Foreign Exchange Crisis"

A leading domestic conglomerate, A Company, is completely revising its management plans for next year, which were finalized earlier this month. This is because the market 'landscape' has changed due to the unexpected impeachment situation and the fact that Donald Trump, the next U.S. president, is introducing new trade barriers almost daily. A Company sees next year's business environment as the worst since the 1997 foreign exchange crisis and is considering reducing facility investments and hiring.

A major domestic retail company, B Company, has decided to put on hold its merger and acquisition (M&A) and new business plans for next year. This is due to the rapid contraction of domestic demand caused by the economic recession and the rise in the won-dollar exchange rate. In the business community, there are concerns that the Korean economy could fall into a 'perfect storm' (complex crisis) next year, given the worsening external uncertainties, intensifying labor-management conflicts, accelerating pursuit by China, and deepening various regulations.

○ Largest Decline Since COVID-19

The various statistics released on the 26th all point to a 'crisis'. According to the Business Survey Index (BSI) by industry announced by the Korea Economic Research Institute on this day, the economy for January next year is expected to worsen for the remaining 8 manufacturing industries, excluding electronics and telecommunications (105.3) and pharmaceuticals (100). The situation is most severe for the automotive (85.3), chemical (85.2), and metal (82.8) industries, which are suffering from the double whammy of China's invasion and Trump's second-term tariff bomb. A BSI below the baseline of 100 means that the economy is expected to worsen compared to the previous month.

Domestic companies are also struggling. The Korea Chamber of Commerce and Industry released data on this day predicting that the retail market next year will grow by only 0.4% compared to this year. This is the lowest figure since 2020 (-1.2%) when COVID-19 hit.

When examining the business conditions surrounding our companies one by one, businesspeople lament that they have no choice but to view next year's economy pessimistically. This is because the impeachment situation and the inauguration of Trump's second term are increasing uncertainty, and the rapid rise in the won-dollar exchange rate, electricity rate hikes, and intensifying low-cost offensive from China are all hitting at once. The petrochemical and steel industries have already begun production cuts and restructuring due to the 'perfect storm'. The battery industry, which has poured trillions into building factories in the U.S., is anxious about the possibility of the abolition of electric vehicle subsidies. Lee Sang-ho, head of the Economic and Industrial Division at the Korea Economic Research Institute, explained, "In a situation where the domestic market is increasingly deteriorating, even the export environment has worsened."

○ "A Crisis of a Different Dimension from the Past"

In the industry, there is a consensus that the current business environment surrounding our companies is worse than during the 1997 foreign exchange crisis or the 2008 financial crisis. This is because, in a situation where basic strength has weakened due to rapid wage increases and weakened R&D competitiveness due to the 52-hour workweek, external risks such as China's pursuit and the strengthening of U.S. protectionism are erupting simultaneously.

A CEO of a large company lamented, "Compared to before COVID-19, the average salary has increased by about 50%," and "China is taking away Korea's food sources one by one, such as semiconductors, electric vehicles, and home appliances, but there is no sharp countermeasure to shake off the pursuit."

The past formula where the depreciation of the won led to economic recovery no longer works. This is because as domestic companies have grown into global players, it has become common to produce overseas and sell in local currency. When the exchange rate rises, only the cost of purchasing parts in dollars increases, but it does not help much when selling.

The expected intensification of labor-management conflicts next year is also adding wrinkles to companies. According to a survey conducted by the Korea Employers Federation on 150 companies, 69.3% predicted that labor-management relations would be more unstable than this year. The amendment to the Commercial Act being promoted by the political sector is also a risk factor. The industry is concerned that if the duty of loyalty of corporate directors is expanded from the company to shareholders, judicial risks will increase, potentially shrinking corporate management.

Reporters Kim Chae-yeon, Kang Jin-kyu, and Park Ui-myung why29@hankyung.com