How is the South Korean economy expected to be measured up come 2014?

The Korea Herald reported on December 30, 2013 that despite the massive weakening of the Japanese Yen currency, and the continued upward momentum of the Korean won currency against its Japanese counterparts, exports on the whole is likely to provide the majority of the push towards sustained economic growth for the country in 2014, while rising household and consumer debt levels remain priority issues which the administration led by President Park Guen-hye, is set to announce comprehensive plans in the coming momths that aims to tackle the potential overleveraging issues faced by many individuals and households in South Korea.

Separately, the South Korean government has released a slew of data this week before 2013 closes. Some of the key economic indicators including industrial production, and consumer price indices showed mixed results. The November 2013 industrial production figures released on December 30, 2013 showed a disappointing fall of 1.30 percent year-on-year (yoy), compared to Reuters’ consensus estimates of a 0.20 percent fall. Service sector output rose by a mere 0.10 percent. Consumer price index figures which were released on December 31, 2013 showed a modest increase of 1.10 percent growth year-on-year (yoy) for the month of December 2013, as compared to the consensus estimate of a 1.20 percent increase. The South Korean won currency (KRW) was last trading at an average spot rate of 1,055.25 – 1,056.20 (Bid/Ask) to the US dollar as of 0935 hours (Hong Kong/Singapore time). The South Korean financial markets were closed on New Year’s Eve, but ended the year with down by 1.83 percent as measured by the KOSPI 200 index. The South Korean won currency has also weakened quite a bit. A quick check on the 3-month daily USD:KRW spot chart indicates a general downtrend of the US Dollar against the Korean Won currency, as indicated in the 3-month daily price movements’ chart for the currency quote:Chart showing USD-KRW currency quote - Dec 31 2013

Source: Thomson Reuters (Please click on the image to get a better view)

On the other hand, a quick check on the JPY:KRW daily chart showed an otherwise different picture when evaluating both quotes. The chart denoting the relationship is as follows:

Chart showing the JPY-KRW exchange rate - Dec 31 2013

Source: Thomson Reuters (Please click on the image to get a better view)

Based on the above chart, it showed a declining Japanese Yen (JPY) currency against the Korean Won (KRW) currency for the past three months since October 2013, when it was trading around KRW 11.0 against Japanese Yen currency. The massive devaluation of the Japanese Yen currency has been a constant debate among both countries’ leaders due the potential impact the it might have on the Korean Won currency, and the country’s (South Korea) heavily reliance on export growth for the majority of the economic progress for many years.

Judging by the various economic statistics published in 2013, the Dec. 30 Korea Herald article pointed out that the South Korean might have bottomed out between 2012 and 2013 following the global economic slowdown seen in the Euro Zone, and the United States, which were some of the largest export markets for South Korean goods and services. Going into 2014, Bank of Korea (BOK) has estimated 2014’s overall economic growth to come in at around 3.8 percent, while the country’s Ministry of Finance released a press statement on Friday, December 27, 2013 indicating that the government’s official forecast for the economy growth is set at 3.9 percent on a year-over-year basis, driven by an expected economic recovery in the European Union (EU) region, the United States, and regional countries such as Japan, South-East Asia, among others. Other targeted areas of the South Korean economy for potential economic growth include small-and-medium sized enterprises (SMEs), bio-pharmaceuticals, and foreign direct investments (FDI). Tourism, music and entertainment forms part of the potential growth areas which many policy makers have hoped to capitalise on, given the worldwide reception towards the country’s K-pop music scene, comics, entertainment, dramas, movies, among many others, or commonly known as ‘Hallyu’ (Korean language and culture).

However, despite the generally rosy outlook for the South Korean economy, the Organisation for Economic Cooperation and Development (OECD) recently revised South Korea’s 2014 GDP outlook from 4.0 percent to 3.8 percent (in line with the BOK’s 2014 economic forecast) due to its relative high exposure to developed economies such as the EU, The Group-of-Seven (G7) industrialised economies, and the United States for the majority of its economic growth. OECD has also urged South Korean policy makers to keep a lid on inflationary growth, and if downside risks happened, the country’s government should set aside sufficient resources, both fiscal and monetary, necessary to tackle any potential disruption to the economy’s overall progress.

Besides the OECD reports, there have also been published reports done by the private sector, such as Moody’s Investor Services which seemed to draw parallel to what was outlined in the OECD report, except for the part concerning the country’s potential huge household debt levels, which if not properly checked, could result on the potential downgrading of the sovereign credit of the country. It urged government policymakers to introduce loan restrictions that limit that over-exuberance of the use of public finances to fund projects that might not produce any significant economic impact if implemented. The nation’s household debt-to-GDP ratio was said to have reached 81.0 percent, and exceeded the 73.0 percent OECD average. This was disclosed through a press interview by journalists to businesses during press media meetings organised by the Korea Chamber of Commerce and Industry. The South Korean government has also forecasted a 2.3 percent year-over-year (yoy) growth in GDP in 2Q13. It is expected that household’s real income to grow by only 1.3 percent over the corresponding period.

While as ambitious as it may be on the expected target growth for South Korea in 2014, several economists continued to express scepticism on the country’s economic outlook, citing the huge household leverage levels, the relative loose loan policies which, if left unchecked, is likely to take down a fast-growing economy such as South Korea, if such issues are not being monitored closely and/or are not severely dealt with across the board.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc