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Samsung's damaging smartphone crisis could put screws on won

by October 14, 2016 General

By Cynthia Kim

SEOUL (Reuters) – Samsung Electronics Co.’s smartphone crisis is likely to ripple through to the foreign exchange market, analysts say, putting the South Korean won under pressure as the global tech giant takes a multi-billion dollar earnings hit from lost sales.

On Thursday, the Bank of Korea (BOK) warned that overall exports could suffer from Samsung scrapping production of the fire-prone Galaxy 7 smartphone, highlighting how the setback at the nation’s largest company is spreading to the broader economy.

The world’s biggest smartphone maker said it expects the phone debacle to slice off about $3 billion from its operating profit over the next two quarters, on top of a $2.3 billion hit to third-quarter profit.

“Markets are seeing a bearish tilt from the Samsung problems,” said Jeon Seung-ji, a currency analyst at Samsung Futures Inc. in Seoul. “The won will continue to face depreciation pressure throughout the fourth quarter from the blow,” she said.

The won has risen 3.6 percent against the dollar so far this year, but the Samsung crisis has already started to take some of the shine off as it became the worst performing currency in Asia this week, down 1.5 percent. [EMRG/FRX]

Investors and analysts agreed that the damage to Samsung’s brand and future earnings would deepen the longer the market was left in the dark about the origin of the fault. Some have already predicted lost revenue in the region of $17 billion for Samsung.

That uncertainty, along with expectations the U.S. Federal Reserve will raise borrowing costs by year-end, could hurt the won, analysts say.

“The won has already been under pressure from the Fed rate hike expectations. The scrap will hurt the won further indirectly as it hit Kospi,” said Qi Gao, FX strategist for Scotiabank in Singapore.

The tech giant first announced the recall of 2.5 million Note 7s in early September following reports of the phones bursting into flames. At $882 per device, that worked out to a sales hit of just over $2.2 billion.

More trouble followed after the firm botched attempts to resolve the crisis when replacement devices also began to smoke and combust – forcing Samsung to ditch sales of its flagship smartphone.

That could put more pressure on exports from Asia’s fourth largest economy, which have contracted for almost all of the past 20 months due to slack global demand.

HI Investment & Securities expects the blow to Samsung to slice 3.4 percentage point off South Korean exports growth in the December quarter from a year earlier. Mobile phone shipments from South Korean companies account for about 6 percent of overall exports, though Samsung’s share of overseas sales wasn’t immediately available.

Foreign exchange market authorities see minimal fallout from the crisis.

“Going into the year end, global events such as the Fed’s December policy decision will dominate the currency market sentiment,” a finance ministry official said, stressing that the impact from any smaller trade surplus resulting from the killing off of the Galaxy Note 7 will be rather small.

All the same, given Samsung’s massive manufacturing scale, the worry is that economic output also could take a hit.

Chang Jae-chul, an economist at Citigroup, is among the few who have cautioned about a non-trivial knock to gross domestic product.

“If we assume a fall in operating profit of the Samsung’s mobile division from this event is translated into a fall in value added of the industry, the fall in annual operating profit by 10 percent to 50 percent could drag GDP growth by 0.07 percent to 0.35 percent in the coming 12 months,” Chang said in a report.

(Additional reporting by Kyoung-ho Lee, Dahee Kim & Jongwoo Cheon; Editing by Shri Navaratnam)