Is the South Korean economy poised to grow further in 2013 and 2014, or will it be short-lived due to the level of household credit growth?
In an article published by The Korea Herald on October 27, 2013, it reported a quote made by the South Korean Finance Minister, Mr. Hyun Oh-seok that he was forecasting the nation’s economy to post a 2.9 percent growth year-on-year (yoy) for the whole of 2013, if the economy maintains its current pace of achieving its 1.1 percent fourth quarter economic growth target. This latest set of economic growth forecast by the South Korea Finance Minister is a series of continuing optimism of the health of the entire South Korean economy. Earlier in October 2013, the South Korea Ministry of Finance released third quarter economic growth figures which came in at approximately year-on-year growth at 1.1 percent, versus the comparable quarter a year ago. This latest set of statistic is generally positive, despite ongoing regional tensions with its neighbours in North Korea, and worries during the months of August/September 2013 over possible US Federal Reserve’s (US Fed) moves to start withdrawing its “Quantitative Easing” (QE) in September 2013. The expected US Fed QE withdrawals have resulted in anxieties among several investors, which dissipated when several market strategists took in the view that with the brief US Federal Government shutdown during the month of October 2013, the US Fed might delay its tapering policies till March 2014, or perhaps during summer due to insufficient data on the overall pace of employment growth in the country. The US Fed’s latest Federal Open Markets Committee (FOMC) meeting will begin its two-day deliberations on monetary policy on Tuesday, and Wednesday, October 29-30, 2013.
The South Korean currency, the won, has been appreciating, and is up by approximately 1.2 percent month-to-date following the 0.6 percent drop from the October 23 to 25, 2013 closing levels. The strong South Korean won currency strengthened on the back of strong foreign capital inflows, which pushed up the stock markets, with the benchmark Korea Composite Stock Index (KSI) rising to 0.3 percent at 2,039.58 as of the market’s close on October 25, 2013. According to a news article from Reuters.com, it quoted some traders saying that they suspected intervention by officials from the Bank of Korea (BOK) and the Ministry of Finance (MOF) last Thursday and Friday, as both have in the past, repeatedly warned about the excessiveness in the overall direction of the economy and the long-term implications of a strengthened won might have on the economy. Early this morning during the early Asian trading hours, October 28, 2013, Bank of Korea (BOK) released the latest Consumer Sentiment data which rose to 106.0 for the month of October 2013, which is up from the previous month of 102.0, and was at a 17-month high. According to the BOK, some of the reasons which contributed to the outperformance in the index were a low base in September 2013, and improved local economic conditions. The fall in September was attributed to a rise in housing expenses.
Most of the latest economic releases by the South Korea government, and BOK appeared to be showing some optimism in the overall pace of direction of the country’s overall economy, including the latest earnings release by one of its largest conglomerates (or chaebols), Samsung Electronics, which posted better-than-expected earnings figures largely due to strong and healthy demand for its semiconductor chips, and mobile phone growth. Being one of the largest chaebols in the country, with a combined market capitalisation equivalent to size of the New Zealand’s economy, I believe that it erased some of the previous misperceptions about the quality of goods manufactured by most South Korean companies, including its automobiles manufactured by the likes of Hyundai, Kia, and other South Korean car manufacturers. The popularity of its music (K-Pop), movies, and tourism growth have also resulted in much of the success in today’s South Korea.
However, despite the optimism shared by many market participants, there is still level of cautiousness over the country’s continuing debt overhang which could dampen some of the bullish sentiments expressed by many of these market participants. One of the critical issues facing the South Korean economy is facing is the relatively high growth in household debt levels whereby if there are no timely controls being put in place to curb such excessive growth in leverage levels, it could be lead to a potential debt spiral situation. Recent data released by the BOK as of August 22, 2013 showing that credit growth during the second quarter of 2013 (April-June) rose at approximately 5.5 percent on an annual basis at 980 trillion won (USD 877.0 billion), versus a revised 5.1 percent gain during the first quarter of 2013. The household credit growth was seen as the fastest since a 5.6 percent rise at the end of third quarter of 2012, and the first acceleration after the rate of household credit growth slowed for seven consecutive quarters. The measure includes borrowings from financial institutions and purchases on credit, and unadjusted for seasonal patterns or inflation. The BOK attributed the latest set of household credit growth figures due to borrowings made for real estate as a majority of South Koreans took advantage of tax-cuts expired at end June 2013. Although it is far from the 9.0 percent over growth in household credit in 2011, I believe that if the pace of household credit growth were to show relentless pace of growth over the next few quarters, the BOK and officials from the Ministry of Finance will likely impose restrictions that could tighten some of the borrowing limits in order to curb the possibility of a ‘runaway’ debt situation taking place in the country.