With the possibility that Iran could blockade the Strait of Hormuz pushing the won-dollar rate above 1,500 won at one point, anxiety is growing in the small and midsize business sector. When exchange-rate volatility rises, domestic small manufacturing companies that import raw materials from overseas inevitably face higher burdens.
According to the small and midsize business industry on the 4th, the exchange rate, which had recently been easing, surged again on geopolitical risks, prompting concerns that cost burdens and management uncertainty could widen for small manufacturers with high dependence on imported raw materials.
Last year's average annual won-dollar rate came to 1,422 won, with the 1,400-won range called a "new normal." The rate fell to 1,420 won at the end of last month, but as geopolitical risks mounted with escalating tensions between the United States and Iran, it broke through 1,500 won intraday on this day. This is the third time the rate has topped 1,500 won, after the 1997 foreign exchange crisis and March 2009 during the global financial crisis.
A sharp rise in the exchange rate translates directly into higher costs for small manufacturers highly dependent on imported raw materials. Small companies that import key inputs such as excavator parts from China are structurally forced to shoulder higher costs as the currency rises.
A small-business official said, "With raw material prices having nearly tripled, if the exchange rate also rises, revenue falls further," adding, "Even if we sell products, there's nothing left in hand, and we can't stop working, so a vicious cycle continues."
Exchange losses stemming from a strong dollar are also cited as a factor aggravating damage to small businesses. A "survey on high exchange rates" conducted by the Korea Federation of Small and Medium Enterprises in January last year on 360 small companies found that 51.4% said they were harmed by the surge. More than half pointed to exchange losses and higher production costs due to the strong dollar.
A small machinery parts manufacturer in the Seoul metropolitan area suffered exchange losses as the exchange rate rose while importing aluminum, zinc and other raw materials from overseas.
A company official said, "The rate, which had been in the 1,300-won range, topped 1,400 won from late 2024, so after we signed raw material contracts, we had to pay more than expected at settlement," adding, "With the rate touching the 1,500-won level this time, we are anxious the same situation will repeat."
The small and midsize business community hopes the U.S.-Iran situation stabilizes quickly. If the conflict drags on, not only corporations that import raw materials but also exporters could face operational difficulties. In fact, last year, exports by domestic small companies to the Middle East region totaled 9.5 trillion won, and the number of exporting corporations reached 13,956, showing the Middle East is a significant market.
The government has prepared policies to reduce damage from a strong dollar. The Ministry of SMEs and Startups decided to consider extending loan maturities for small manufacturers and microbusiness owners that import raw and subsidiary materials if a strong dollar persists and causes damage. It expanded exchange-risk policy support, which had focused on exporters, to include domestic small manufacturers and microbusiness owners that import raw and subsidiary materials.
Kim Hee-jung, head of economic policy at the Korea Federation of Small and Medium Enterprises, said, "What is urgent is measures such as extending loan maturities," adding, "If the situation prolongs, petrochemicals, plastics and textiles will be heavily affected, so steady monitoring is needed."
Kim added, "Preparing for exchange-rate risk is not something you can suddenly do in a crisis; it has to be managed routinely," noting, "Because it is difficult for the government to provide direct support, corporations need to prepare by using tools such as exchange fluctuation insurance that partially compensates losses when they are hurt by currency moves."