Is the South Korean economy going to outperform against its regional rivals?

The South Korean government released its latest fourth quarter 2013 Gross Domestic Product (GDP) growth report on January 22, 2014, which showed an increase of 3.9 percent when measured on a year-on-year (yoy) basis, ahead of the 3.3 percent during the third quarter and a median of 4.0 percent expansion expectation. This is according to a poll done by Thomson Reuters News on a group of economists.

The growth story does continue for South Korea, but not according to a Bloomberg Television interview with a Seoul-based Goldman Sachs (GS) Chief Economist, early during the Asian trading hours on Jan. 23, where he expressed his mild bullishness over the prospects for the South Korean economy going forward, as details of the report indicated that income growth was merely a 0.4 percent increase during the fourth quarter of 2013, and private consumption only grew by 0.9 percent during the same time period. There is growth coming out of from the capital expenditures side, but when measured on year-on-year (yoy) basis, growth is still showing a downtrend. One of the biggest concerns, the Chief Economist from Goldman Sachs cited, was the continuation of the strength being shown on South Korean Won and Japanese Yen currency crosses which has not favoured many South Korean exporters due to a weakening Yen, and a strengthening Won, thus hurting export competitiveness. The Japanese exporters was said to account for approximately 6.0 percent of the South Korean economy, and there have been various exchanges made by both countries regarding the currency issues, where readers might recall an incident back in September 2013 when one of Japanese government ministers was asked what would be his response to various complaints made by his South Korean counterparts on the Won/Yen currency issues, and his reply was being worded as not being understanding to the difficulties faced by many of the South Korean exporters as they try to hedge their currency exposures to cope with a weakening Japanese Yen currency.

The official forecast by the South Korean government which is currently led by President Park Guen Hye was approximately 4.0 percent in 2014, and most of the economists and investors would have agreed that it is a reasonable growth target, but issues continue to remain, particularly in the slowing capital expenditures growth. Thomson Reuters News published a news article on Jan 22 where it was reported that the economy grew a seasonally-adjusted quarterly rate of 0.9 percent increase compared to the third quarter of 2013, and relatively in line with most of the economists polled by Thomson Reuters News. The sequential third quarter growth averaged by approximately 1.1 percent and remained steady when compared to the second and third quarters in 2013. The only bright spot came from construction investment which rose during the fourth quarter of 2013 on a seasonally adjusted basis to 6.4 percent, which was reportedly to be one of the fastest expansions seen since 2012.

The South Korean major exporters including Samsung Electronics, and Hyundai Motors, accounting for an approximately two-thirds of the domestic economy continue to be main beneficiaries in the South Korean economy, and interest in its global brand names. The rest of the economy sectors, including tourism, entertainment, cinemas shows, music known as ‘K-Pop’ and television drama series, Korean language education courses account for the rest. There has been a keen sizeable following on the South Korean entertainment scene ever since K-pop music groups like ‘Girls Generation’, ‘Wonder Girls’, among others made their debuts into the international entertainment industry, and broken several records in terms of album sales, music downloads, increasing fan base, receiving lots of interest and publicity along the way. The South Korean government has earlier announced that they intend to report their future economic growth outlooks that show the inclusion, and exclusion impacts made by the contributions coming from Samsung Electronics, which has over the years taken a significant chunk of the economic pie in South Korea, given the popularity of its handsets, television sets, wearables, among others. The thinking was that if Samsung Electronics earnings reports and projections failed to meet expectations, it might result in sharp falls on the major domestic stock indices, namely the KOSPI index, causing negative perceptions among investors regarding their outlooks for the South Korean economy. It is also intended to cushion the blow coming from the systematic risks faced on the South Korean economy if Samsung Electronics does not perform well in terms of earnings expectations. This was exactly being shown when Samsung Electronics reported their results, which have been weakening for the past few quarters due to keen competition among various global handset makers, and margin erosions, the KOSPI stock index did pull back significantly on many of such earnings announcements made by Samsung Electronics, thus causing some unease among investors, and institutional fund managers at a time when the South Korean economy is growing at a sustainable pace.

With the latest GDP report of headline growth of 3.9 percent on a year-over-year (yoy) basis during the fourth quarter of 2013, and Bank of Korea (BOK) maintaining interest rates steady at 2.5 percent, the South Korean economy appeared to have weathered much of the significant capital outflows seen in several emerging economies such as India, Indonesia, Turkey, Brazil, among others during 2013 as the US Federal Reserve starts to gradually unwind its monetary stimulus programmes. There are some hopeful signs for the South Korean economy will continue to maintain the same growth trajectory, but critical risks including the rising household debt to gross disposable income of 153.4 in 2012, and ahead of the average Organisation for Economic Co-operation and Development (OECD) measure of 121.3, strong Won/Yen cross currencies, rising Inter-Korean Peninsular tensions with its Northern neighbours, among others, might derail the growth momentum as 2014 moves ahead.

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