As the won-dollar exchange rate briefly topped 1,500 won on concerns including a possible blockade of the Strait of Hormuz by Iran, anxiety is growing among small and mid-sized businesses. When exchange-rate volatility rises, the burden inevitably increases for domestic small manufacturers that import raw materials from overseas.
According to the small-business sector on the 4th, the exchange rate, which had recently been easing, has jumped again due to geopolitical risks, prompting concerns that cost burdens and management uncertainty could expand for small manufacturers highly dependent on imported raw materials.
The average won-dollar exchange rate last year was 1,422 won, making the 1,400-won level a "new normal." The rate fell to 1,420 won at the end of last month, but with overlapping geopolitical risks from escalating tensions between the United States and Iran, it briefly broke through 1,500 won during intraday trading on this day. This is the third time the rate has exceeded 1,500 won, following the foreign exchange crisis in 1997 and March 2009 during the global financial crisis.
A sharp rise in the exchange rate directly translates into higher cost burdens for small manufacturers that rely heavily on imported raw materials. Small firms that import key inputs, such as excavator equipment parts, from China are structurally forced to shoulder higher costs as the currency rises.
A small-business official said, "With raw material prices up nearly threefold, if the exchange rate also rises, revenue falls further," adding, "Even if we sell products, there is nothing left in hand, and we can't just stop working, so the vicious cycle continues."
Foreign-exchange losses stemming from the strong dollar are also cited as a factor exacerbating damage to small businesses. A "survey on high exchange rates" of 360 small businesses conducted by the Korea Federation of Small and Medium Enterprises in January last year found that 51.4% said they suffered damage due to the surge. More than half pointed to foreign-exchange losses and higher production costs caused by the strong dollar.
A small machinery parts manufacturer in the Seoul metropolitan area suffered foreign-exchange losses as the exchange rate rose during the process of importing raw materials such as aluminum and zinc from overseas.
A company official said, "The exchange rate, which had been in the 1,300-won range, exceeded 1,400 won from late 2024, so after we signed raw-material contracts, we had to pay more expense than expected at settlement," adding, "Now that the rate has touched the 1,500-won level, we are nervously watching to see if the same situation will be repeated."
The small-business community hopes the situation between the United States and Iran stabilizes quickly. If the conflict drags on, not only corporations that import raw materials but also exporters could face difficulties operating their businesses. In fact, last year domestic small businesses exported 9.5 trillion won to the Middle East region, and the number of exporting companies reached 13,956, showing the Middle East is a meaningful market.
The government has prepared policies to mitigate damage from the strong dollar. The Ministry of SMEs and Startups decided to consider measures such as extending loan maturities for small manufacturers and small merchants that import raw and subsidiary materials, who could suffer if the strong-dollar phase persists. It expanded exchange-risk policy support, previously focused on exporters, to domestic small businesses and small merchants that import raw and subsidiary materials.
Kim Hee-jung, head of economic policy at the Korea Federation of Small and Medium Enterprises, said, "Extending loan maturities and similar steps are the most urgent," adding, "If the situation is prolonged, petrochemicals, plastics, and textiles will be heavily affected, so steady monitoring is needed."
Kim added, "Hedging exchange-rate risks is not something you can suddenly do in a crisis; it's an issue that must be managed in normal times," and said, "Since it is difficult for the government to provide direct support, corporations need to prepare by using tools such as exchange-rate fluctuation insurance, which compensates for part of the losses when they incur damage from currency moves."