Docstoc

Country report SOUTH KOREA

Document Sample
Country report SOUTH KOREA Powered By Docstoc
					Country report SOUTH KOREA

Summary South Korea’s economy is facing strong headwinds amid the current global economic crisis. The economy is expected to enter a severe recession due to a number of factors. First, the country’s strong reliance on exports has exposed it to the faltering external demand. Second, Korea’s high proportion of export-led capex implies that both industrial production and gross fixed capital formation will weaken in the coming months. Third, highly leveraged Korean consumers will cut back on spending on the back of tighter credit conditions, falling incomes and greater job insecurity. Fourth, the financial sector is grappling with worsening liquidity conditions due to their reliance on the international capital markets for funding. Therefore, the banks’ low appetite to extend credit is counteracting the effects of the recent monetary easing by the central bank. The government’s solid fiscal position will give them considerable room to stimulate the economy. However, their choice of increasing the share of tax cuts in the stimulus package, instead of greater public spending, is unjustified given the high indebtedness of consumers. As we do not see any major catalyst to support the economy, we lowered our growth forecast for 2009 to -5.0%. In our view, the risks to growth are still to the downside. Things to watch: • • • Economic recovery in the west Liquidity conditions FX reserves’ coverage of the short-term external debt Shahin Kamalodin Country Risk Research Economic Research Department Rabobank Nederland P.O.Box 17100, 3500 HG Utrecht, The Netherlands +31-(0)30-21-31106 S.A.Kamalodin@rn.rabobank.nl

Author:

Contact details:

February 2009

Rabobank

Economic Research Department

Page: 1/11

Country report SOUTH KOREA

South Korea
National facts Type of government Capital Surface area (thousand sq km) Population (millions) Main languag es Main religions Republic Seoul 99 48.7 Korean Eng lish Christian (26%) Buddhist (23%) Foreig n trade (2008) Head of State (president) Head of Govern ment (prime-minister) Monetary unit Economy (2008) Economic size Nominal GDP Nominal GDP at PPP Export value of goods and services IMF quotum (in mln SDR) Economic structure Real GDP growth Agriculture (% of GDP) Industry (% of GDP) Services (% of GDP) Standards of living Nominal GDP per head Nominal GDP per head at PPP Real GDP per head bn USD 862 1299 522 2927 2008 4.2 3 40 58 USD 17512 26393 18489 % world total 1.44 1.86 2.66 1.35 5-year av. 4.4 3 40 57 % world av. 181 234 231 Lee Myun g-Bak Han Seung -soo won (KRW ) Main export partners (%) China US Japan Hong Kong Main export products (%) Information and communications products Semicond uctors Chemicals Machinery and equipment Main import products (%) Crude petroleum Machinery and equipment Semicond uctors Chemicals Openness of th e economy Export value of G&S (% of GDP) Import value of G&S (% of GDP) Inward FDI (% of GDP) 61 63 0.1 20 11 8 8 13 10 10 10 22 12 7 5 Main import p artners (%) China Japan US Germany 18 16 10 4 Social an d governance indicators Human Developmen t Index (rank) Ease of doing business (rank) Economic freed om index (rank) Corruption perception s index (rank) Press freedom index (rank) Gini index (income distribution) Population below $1 per day (PPP) rank / total 25 / 177 23 / 178 40 / 157 40 / 180 47 / 169 31.6 <2%

Source: EIU, CIA World factbook, UN, Heritage foundation, Transparency International, Reporters without borders, World Bank.

Economic structure and growth South Korea is one of the most industrialized and dynamic economies in Asia. Prior to the Asian crisis, the economy grew 8% yoy on averagej (1970-1996). In the aftermath of the crisis, growth moderated to an annual average rate of 4.4% (1998-2007). Understandably, the catch-up phase was over and the economy began to resemble the more limited dynamic of its OECD peers. Since the inception of the credit crisis, however, the economy is reeling. GDP has already contracted by a staggering 5.6% qoq in the fourth quarter of 2008, implying that growth in 2008 as a whole has halved to 2.5% from 5.0% in 2007. Against the backdrop of the global financial turmoil and weakening domestic demand, we expect the country to enter a full-blown recession this year (see chart 1). The country’s open and mature financial sector has exposed it to the ills of the Western financial markets. We have penciled in a 5.0% yoy decline in GDP for 2009 (see chart 2). We need to stress that risks are clearly to the downside.
Chart 1: Weakening economic activity
% yoy % yoy

Chart 2: Growth forecast
6 4 2 0 -2 -4 -6
External demand 06 04 05 Gross fixed investment Inventory changes
% change p.a. % change p.a.

6 4 2 0 -2 -4 -6

20 15 10 5 0 -5 -10 90 92 94 96 98 00 02 04 06 08
GDP Leading indicator

20 15 10 5 0 -5 -10

07

Government consumption 08e 09f 10f Private consumption Economic growth

Source: Bloomberg

Source: EIU, Rabobank

February 2009

Rabobank

Economic Research Department

Page: 2/11

Country report SOUTH KOREA
The export sector, which is equivalent to around 50% of GDP, has been circumscribed by the mordant state of the global economy (see chart 3). Exports tumbled by 9.2% qoq in the fourth quarter of 2008 despite the fact that the Korean won depreciated strongly in trade-weighted terms last year, making it the poorest performing currency in Asia (see chart 4). However, with exports rising by 6.2% over the year as a whole and imports by 3.0%, net trade still managed to contribute around 85% of the overall GDP growth for the year. The latest export figure released for January shows that the rate of attrition has accelerated even more in the wake of retrenching global economic activity. The 32.8% yoy drop in exports in that month was the worst since figures were first compiled in 1957. We expect the export sector to have an anemic performance for the next two years given our expectation of a sluggish recovery of the global economy by 2010. Having said that, we need to point out that part of the rapid slowdown of exports throughout the region is due to the drying up of trade finance. Furthermore, Korea’s great strides in its move up the valueadded chain in manufacturing has added to the pain of the export sector. The share in exports of products in the machinery & transport equipment (MTE) group, which includes electronics, electrical machinery, telecom equipment as well as vehicles, rose from 32% in 1990 to 51% in 2007.
Chart 3: External demand
% yoy USD bn

Chart 4: Real effective exchange rate
6 4 2 0 -2 -4 -6 140 130 120 110 100 90 80 70 60 94
China

60 40 20 0 -20 -40 -60 90 92 94 96 98 00 02 04 06 08
Trade balance (rhs) Exports Imports

140 130 120 110 100 90 80 70 60 96 98 00 02 04 06 08
Korea Malaysia Philippines Thailand

Source: Bloomberg

Source: BIS

Given that the atrophy in exports is closely correlated with industrial production in Korea, the record 18.6% yoy drop of factory output in December was expected (see chart 5). Fixed investment fell 8.8% qoq in Q4 2008 as firms sharply curtailed their spending on machinery and equipment. The drop in factory output combined with a sharp fall in business sentiment has resulted in the softening of the labor market. Net employment declined for the first time since October 2003 in December. Official data released showed that the economy shed some 103,000 jobs in January compared to a year earlier. The labor market is expected to weaken further as falling earnings force companies into potential retrenchment and a freezing of hiring plans. This will undoubtedly put downward pressure on wages and further weaken purchasing power. Hence, Korean consumers are rightfully concerned over job security and falling incomes (see chart 6).
Chart 5: Industrial production
% yoy % yoy

Chart 6: Retail sales
% yoy % yoy

40 30 20 10 0 -10 -20 -30 90 92 94 96 98 00 02 04 06 08

40 30 20 10 0 -10 -20 -30

14 12 10 8 6 4 2 0 -2 jan-06 jul-06 jan-07 jul-07 jan-08 jul-08

14 12 10 8 6 4 2 0 -2

Source: Bloomberg

Source: Bloomberg

February 2009

Rabobank

Economic Research Department

Page: 3/11

Country report SOUTH KOREA
Therefore, the 4.8% qoq contraction of private consumption in Q4 2008, the largest decline in a decade, is understandable. Over the year as a whole consumer spending grew by just 0.5%, down from 4.5% in 2007. We do not see any positive catalysts that can support consumption given that the Korean households are even more leveraged than their US counterparts. In 2007, household debt amounted to 148% of disposable income. The constriction of credit will certainly weigh down on consumption growth in the coming quarters. The high indebtedness of consumers combined with the deterioration of the labor market has posed significant downside risks to the property market. The real estate sector is also cooling down due to the lagged effects of tighter monetary conditions until mid-2008 (see chart 7). In any case, we are particularly concerned about the impact of a possible hard landing in the property market on the banking sector, especially for mutual savings banks (MSBs). So far, the government has introduced a number of measures to support this flagging sector. The plans include buying back idle land and empty apartments from real estate companies. Regulatory restrictions introduced earlier to cool speculative demand have also been eased, while tax measures have been introduced to stimulate demand. The greater risk to the banks’ balance sheets stems from an increase in bankruptcy of small and medium enterprises (SMEs), which employ over 80% of the Korean workforce. These companies enjoy less pricing power than their larger counterparts and show smaller profit margins. In recent years, leverage amongst SMEs has also risen significantly as banks have eagerly courted them to grow their loan books. As a result, their debt-servicing burden has risen. The slump in economic activity will mean the SMEs are likely to face failure or pressure to shed employees. Both decisions can lead to a significant deterioration of the banks’ asset quality as a significant proportion of bank lending goes to SMEs and households (see chart 8). As such, banks have responded by cutting their corporate lending by the most in 4 years in December (USD 5bn). Bank lending to households has remained robust so far, growing by 6.8% yoy in December, but we expect it to slowdown in the forecast period given our expectation of a weaker labor market. The reluctance of banks to increase lending is justified given that they incurred their first aggregate loss (USD 216mln) in the final quarter of 2008 since 2000. Meanwhile, their BIS capital adequacy ratio dropped to 10.8% in September, from 12.3% in 2007, amid rising loan defaults.
Chart 7: House prices
% yoy % yoy

Chart 8: Bank lending
KRW trn

25 20 15 10 5 0 -5 -10 -15 90 92 94 96 98 00 02 04 06 08

25 20 15 10 5 0 -5 -10 -15

900 800 700 600 500 400 300 200 100 0 05 06 07 08 09 10 11 12 Households SMEs Large companies

Source: Bloomberg

Source: Bloomberg

The Korean financial sector also suffered in the aftermath of Leman Brothers’ bankruptcy as 10% of their funding comes from the international capital markets. The domestic financial market came under strong pressure amid heavy non-resident portfolio withdrawals and rising concerns over liquidity positions at Korean banks. The worsening liquidity conditions of Korean banks, together with an expected economic slowdown, raised the risks to financial stability. On balance, we believe the Korean banks’ strong reforms subsequent to the Asian crisis makes them better equipped to weather the storm. Improvements have been made in the quality of the management of financial institutions and in standards of supervision. The non-performing loan
February 2009 Rabobank Economic Research Department Page: 4/11

Country report SOUTH KOREA
(NPL) ratio has fallen steadily and currently stands at around 1%. Furthermore, Fitch estimates that at April 2008, Korean banks’ gross exposure to the US subprime mortgage-backed securities (MBSs) and other structured investments stood at USD 2.8bn or 0.3% of GDP. Banks’ net exposure, after accounting for cumulative losses following markdowns, was USD 2.03bn or 0.2% of GDP. Political and social situation On 19 December 2007, Lee Myung-Bak, former Hyundai CEO and mayor of Seoul, of the conservative Grand National Party (GNP) won a landslide victory with 48.7% of total votes to succeed Roh Moo-hyun of the United Democratic Party (UDP) as South Korea’s president. He began his five-year term on 25 February 2008. In April, the GNP also increased its members in the 299seat legislature to 153 from the 136 it won in the 2004 elections, at the expense of its main rival, the UDP. The election of Mr. Lee was widely considered an attempt to reinvigorate the South Korean economy. The electorate has apparently grown tired of previous left-leaning governments' focus on grand political issues such as the pursuit of peace with North Korea, democracy, and greater equality. Lee initially made a "747 pledge" of increasing annual economic growth to 7% and per-capita income to USD 40,000 from USD 19,790 in 2007, as well as turning the country into the seventh-largest economy in the world through swift deregulation and the implementation of tax incentives. Events have taken a significant turn since the president’s rousing success in February. Public confidence in the president has eroded following the administration’s April announcement of a decision, as part of the Korea-US Free Trade Agreement, to lift the import ban on US beef. This ban was first imposed in 2003 after the outbreak of mad cow disease. The “beef crisis” sparked a series of demonstrations in Korea, the largest of which was a rally on 10 June that drew at least 100,000 people. Opinion polls showed that the president’s approval ratings plummeted to only 17% in June from 57% in February. To restore confidence in the administration, the president has apologized to the nation twice on the beef issue and undertook a major cabinet reshuffle following the prime minister and the entire cabinet’s offer to resign to take responsibility for the mishandling of the beef issue. Korean and American officials also renegotiated stricter quarantine of US beef imports to restrict imports to cattle less than 30 months old. As soon as the government was relieved that the beef crisis was over, the country was struck by the credit crisis. And the ability of the president to steer the economy had become more difficult in the immediate aftermath. Many GNP members of parliament are starting to regard Lee Myung-bak as a liability. At the same time, the opposition party is attempting to obstruct bills as much as they can. In our view, the president has risked by over-extending his campaign promises to the public given the current backdrop of flagging economic activity. This can lead to a further drop in his popularity. To shore up the government’s falling approval ratings, the president replaced the finance Minister Kang Man-soo as the latter was facing severe media criticism for his handling of the financial crisis that has paralyzed the domestic financial system. The chief presidential economic adviser was also replaced after being accused of corruption while in his former employment at the Woori Financial Group. We believe the replacements cannot achieve much given the severity of the adverse external shocks. Korea faces a more serious geopolitical threat than most other sovereigns, in the form of an unpredictable nuclear-armed northern neighbour that depends on foreign aid to maintain its regime. There are strong suspicions that Kim Jong-il, North Korean leader, may be ill. His poor health definitely poses an additional risk. The suspicions have been raised following his conspicuous absence from celebrations of the country's 60th anniversary in early September and his continued

February 2009

Rabobank

Economic Research Department

Page: 5/11

Country report SOUTH KOREA
absence from public events since then. With no known succession plan in place, Kim's demise could trigger a power struggle among contenders for his position and destabilize the nuclear state. We will closely monitor how the relationship between the two nations will evolve following the replacement of the South Korean unification minister Kim Ha-joong with Hyun In-taek, who is known to be a hardliner in policy towards North Korea. Economic policy The rapid proliferation of downside risks to growth has supplanted the concerns of the Bank of Korea (BOK) over inflation. This is because inflation has staged a sustained retreat in recent months as supply-side constraints eased and demand pressures relaxed (see chart 9). The consumer price index (CPI) rose by 3.7% in annualised terms in January, marking the lowest rate of inflation in 11 months. The producer price index (PPI) increased 4.7% yoy in the same month, sharply down from 12.5% in July 2008. Against this backdrop, the BOK has turned to an easing mode since October 2008. The benchmark 7-day repo rate has been lowered by a cumulative 325 basis points to a record low of 2% (see chart 10). We expect the crumbling of external demand, which will exacerbate the slump in domestic activity, to prompt the BOK into further rate cuts in the coming months. This is based on the assumption that higher imported inflation resulting from the weakness of the won will be offset by weakening domestic demand and falling international commodity prices.
Chart 9: Easing inflationary pressures
% yoy % yoy

Chart 10: Looser monetary policy
% %

35 30 25 20 15 10 5 0 -5 -10 90 92 94 96 98 00 02 04 06 08

35 30 25 20 15 10 5 0 -5 -10

6 5 4 3 2 1 0 99 00 01 02 03 04 05 06 07 08

6 5 4 3 2 1 0

CPI

PPI

M2

Source: Bloomberg

Source: Bloomberg

Unfortunately, the worsening liquidity conditions of the Korean banks has prevented them from extending credit to the private sector. Therefore, rate cuts in Korea will not have a strong impact on the economy even though 92% of all the mortgages have variable rates. The government has not stayed on the sidelines and has taken significant measures to help unclog the monetary transmission channels. In October 2008, it agreed to guarantee Korean banks' external debt up to USD 100bn until June 2009 for a period of 3 years. The BOK also injected more liquidity into banks by purchasing repos, government bonds, and monetary-stabilization bonds. It also made additional funds more accessible by expanding the range of collaterals allowed in its monetary operations. In addition, USD 62.5bn of foreign reserves were utilized for direct US dollar lending to the banks. Finally, to further relieve the pressure of the USD funding of the banks, the BOK established temporary liquidity swap facilities with the Federal Reserve, Bank of Japan and People’s Bank of China for USD 30bn, USD 20bn and USD 28bn, respectively. Apparently, the measures taken by the government have paid off. The spread between the interbank lending rate and the policy rate has started to thaw; yet still remains at elevated levels (see chart 11). The cross-currency basis swap rate has fallen as well from its record highs, suggesting that the dollar funding pressure of the banks have eased slightly (see chart 12). However, it is too early to proclaim that bank lending will pick up in the coming months.

February 2009

Rabobank

Economic Research Department

Page: 6/11

Country report SOUTH KOREA
The headwinds the Korean economy is facing are too strong to be tackled by monetary authorities alone. The government’s finances are sufficiently healthy to ease fiscal policy without badly damaging the overall budget balance. Years of fiscal conservatism have given the government considerable room to bolster the ailing economy. Public debt stood at only 29.4% of GDP in 2007 and the budget surplus was 3.7% of GDP. Indeed, the authorities announced a KRW 51trn fiscal stimulus package, equivalent to USD 38bn or 4% of GDP, of which USD 12bn is extra spending and the rest will be in the form of tax cuts. In their latest attempt to buoy growth, the government also unveiled a “Green New Deal” (GND) worth KRW 50trn (also 4% of GDP) in January 2009. The GND is earmarked for the next 4 years in schemes ranging from the construction of 2 million energy efficient homes and facilities to generate energy from waste materials to major clean-up programs of rivers and coastlines. The authorities hope that the GND will create nearly a million jobs. The total stimulus from both packages will amount to 5% of GDP in 2009.
Chart 11: Liquidity conditions improved
%

Chart 12: USD funding pressure remains
bps bps

%
Collapse of Lehman Brothers

2 1,5 1 0,5 0 05 06 07

2 1,5 1 0,5 0

0 -1 00 -2 00 -3 00 -4 00 -5 00 -6 00 -7 00 nov-06 mei-07 nov-0 7 mei-0 8 n ov-08
Cross currency basis swap (1 yr)

0 -100 -200 -300 -400 -500 -600 -700

08

09

Certificate of deposit rate (91-day) vs the policy rate

Source: Bloomberg

Source: Bloomberg

The policymakers have declared that the economic stimulus packages are based on the rule of “TTT” (timely, targeted and temporary). Unfortunately, the packages are not timely as the GND is spread over 4 years, which will certainly dilute its impact. It is also not well targeted since the highly leveraged Korean firms and households are unlikely to spend more even with tax cuts amounting to USD 26bn. For that matter, the government should have increased the share of public spending in the stimulus package if it wished to get the most bang for the buck. The extra spending and tax cuts cannot stave off the upcoming recession, but can only contain its depth and duration. We are only hopeful that the government is committed to a balanced fiscal budget once the economy is on a recovery path. If the financial markets would not be convinced of the temporary nature of the package, the yield on the government bond will begin to rise. The government’s exchange rate policy has been to defend the currency by means of using its FX reserves. The weakness of the won stemmed largely from three factors. First, international investors became more risk-averse towards all emerging markets owing to the prolonged global financial turmoil. Second, Korea’s bleak economic outlook resulted in lower earnings multiples, which made the equity market less attractive. Third, the country posted its first annual current account deficit since the Asian crisis. Unluckily, the significant depreciation of the won has only exacerbated the exchange-rate pass-through effect and suppressed domestic demand, without having any meaningful impact on exports. Thus, the measures taken by the policymakers to defend the currency was absolutely necessary. Balance of Payments As mentioned previously, retrenching external demand, which resulted in a USD 2.97bn trade deficit in January, continues to batter the export sector. Naturally, amid the economic hardship, consumers easily shun the higher value-added products of Korea and purchase mostly goods that satisfy their basic needs (i.e. mostly purchase goods from poorer Asian countries). The misery of

February 2009

Rabobank

Economic Research Department

Page: 7/11

Country report SOUTH KOREA
the export sector will continue given that the intra-region trade has not created the desired buffer from a slowdown in the Western economies. It seems that the idea that Korea, along with the rest of the emerging markets, has “decoupled” from the Western countries proves to be a myth. Asian countries’ imports from Korea consist mostly of components, which are assembled and, subsequently, shipped primarily to the West. Thus, the US and the EU continue to act as the consumer-of-last-resort for Korea. Going forward, we expect the country to post a deficit on the trade balance in the forecast period unless imports decline even faster on the back of weaker domestic demand and lower international commodity prices. The upside risks to our baseline scenario are (i) a material improvement in the availability of trade finance and (ii) a quicker-than-expected recovery of the Western economies. The services account will remain in deficit, largely because expenditure by outbound tourists from Korea will remain well above tourism earnings. The surplus on the income account will be maintained, as outflows of profits on foreign investments in Korea will be offset by inflows from the substantial (and still rising) stock of assets held abroad by Korean businesses. Overall, we expect the current account balance to remain in deficit in 2009 after posting a shortfall of USD 6.4bn in 2008 (see chart 13).
Chart 13: Current account balance
% of GDP % of GDP

Chart 14: Balance of payments
6 5 4 3 2 1 0 -1 -2 -3 -4

6 5 4 3 2 1 0 -1 -2 -3 -4 04
Trade

USD bn

USD bn

05
Services

06

07
Income

08e
Transfers

09f

10f

10 5 0 -5 -10 -15 -20 -25 -30 02 03 04 05 06 07 08
Current account Capital account

10 5 0 -5 -10 -15 -20 -25 -30

Current account

Source: EIU, Rabobank

Source: Bloomberg

Korea’s balance of payments came under severe pressure amid increased risk-aversion amongst international investors. This led to the massive USD 50.9bn deficit on the capital account balance in 2008 as a whole (see chart 14). In particular, October’s deficit figure at USD 24.8bn was a record low. Part of the explanation for capital flowing out of the country is weaker economic fundamentals. The primary reason was investors’ concern about the possibility of a repeat of the currency crisis. This was lucidly manifested in the sudden jump of the CDS spread on the sovereign to 675 bps on October 27, 2008 (see chart 16). In our view, the elevated level of Korea’s CDS spread by historical standards implies that investors are still uncertain about the country’s economic prospects.
Chart 15: Stock exchange
160 140 120 100 80 60 40 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 160
800

Chart 16: Sovereign CDS (5 yr)
bps bps

800 600 400 200 0 jul-07
Korea

140 120 100 80 60 40
0 jan-07 jan-08
China

600 400 200

jul-08
Thailand

jan-09
Malaysia

KOSPI

MSCI Asia Ex Japan

Source: EIU

Source: Bloomberg

February 2009

Rabobank

Economic Research Department

Page: 8/11

Country report SOUTH KOREA
External position Korea’s external indebtedness has been rising at a rapid pace since 2006. Total external liabilities increased by USD 237bn since end-2005 to USD 425bn, or 44% of GDP, in the third quarter of 2008. Worryingly, around 45% of the gross external debt (GXD) is short-term borrowing. Our concern is exacerbated by the fact that the FX reserves can barely cover the amount of short-term external debt (STXD) outstanding (see chart 17). Since April 2008, FX reserves depleted at an astronomical rate as the BOK was attempting to (i) relieve the dollar funding pressure of local banks and (ii) counter the strong depreciation of the won. Although there is a possibility that a further drop in the FX reserves and/or increase in the STXD can lead to a speculative attack on the won, we deem such an outcome as highly unlikely. Our cautious optimism is owing to the fact that the increase in the STXD is not used to fund current account deficits, as was the case in the pre-Asian-crisis period. The recent build-up in STXD has been mainly attributable to hedging-related activities by major shipbuilders and asset managers, as well as foreign investors’ arbitrage-related purchase of domestic government bonds. Around 22% of the increase in external borrowing has been in the context of banks providing currency hedging1. Another 13% of the rise in GXD reflects advance receipts for ship exports, which show up as trade credits until delivery. Finally, a further 20% increase in GXD is attributable to foreign banks’ branches’ and foreigners’ increased bond investments, especially in Korea Treasury bonds, for interest arbitrage transactions, as such transactions are also settled with FX forwards. Huge arbitrage opportunities opened up when similarly dated offshore forward rates and cross-currency swaps dropped below the onshore certificate of deposit (CD) or government bond yield (see chart 18). Banks’ significant demand for foreign funds through currency swaps to meet clients’ hedging needs depressed the local-currency interest rate implied in forwards and currency swap transactions relative to domestic money market yields.
Chart 17: External debt
USD bn USD bn

Chart 18: Arbitrage opportunities
500 400 300 200
% %

500 400 300 200 100 0 95 Total 97 99 01 03 05 07 09 Short-term

7 5 3 1

7 5 3 1 -1
May-07 Nov-07 May-08 Nov-08
Arbitrage opportunity in currency swap market Cross currency basis swap rate (1yr) - Koribor (3m) Government bond rate (1yr)

100 0 FX reserves

-1
Nov-06

Source: EIU

Source: Bloomberg

Thus, reduced forward selling could be expected from a slowing in both the growth of ship orders and investment abroad by Korean residents in the context of the global slowdown. Recent exchange rate developments may also reduce desired hedging ratios, as uni-directional hedges against the won appreciation have become less justified during periods of currency weakness. Moreover, advance receipts on ship contracts are unwound on completion of ship production. As the dollar funding pressure will abate, the arbitrage opportunities for foreigners will diminish as well. Overall,we expect the short-term external borrowing to fall in the coming months.

In this setup, exporters (or asset managers) sell USD forward to lock their future dollar earnings into Korean won. When export proceeds (or future receipts) are subsequently received from clients (or investments), exporters (or asset managers) deliver their dollar receivables to the banks at the relevant forward rate. Banks, which act as exporters’ (or asset managers’) counterparties in the forward contract, borrowed short-term dollar loans via the interbank or at offshore money markets to square off their long dollar positions. This has led to the substantial build-up in banks’ STXD during the term of the FX forward contracts.

1

February 2009

Rabobank

Economic Research Department

Page: 9/11

Country report SOUTH KOREA
The rational justification for the rise in GXD notwithstanding, there is enough reason to be concerned about any further rise in Korea’s external borrowing (or fall in FX reserves) as it can still result in a speculative attack on the currency. The technicalities of the information involved concerning the rise in Korea’s GXD may deter market-participants to go through strenuous efforts to understand the details. Fortunately, the past experience of the government has taught them that investors have a strong proclivity to “rush for the exit” if they sense an even slight chance of a currency crisis. As such, they have left nothing to chance and instead kept the FX reserves stable in the past two months.

February 2009

Rabobank

Economic Research Department

Page: 10/11

Country report SOUTH KOREA
South Korea
Sel ection of e conom ic in dic ators Key coun try ri sk ind icators GD P (% re al ch ange pa) Consu mer prices (ave rag e % ch ange pa) Current acc ount balan ce (% of GD P) Total foreign e xchan ge reserves (ml n USD) Econ omic gro wt h GD P (% re al ch ange pa) Gross fixed inve stmen t (% real chang e pa) Private cons umption (% real chan ge pa ) Go vern ment consumpt ion (% real chan ge p a) Exp orts of G &S (% rea l ch ange p a) Imp orts of G &S (% rea l ch ange pa) Econ omic poli cy Budg et balanc e (% of GD P) Public d ebt (% of GD P) South Korea, M oney market int eres t rate (%), N/A M2 g rowth (% cha nge p a) Consu mer prices (ave rag e % ch ange pa) Exch ang e rate LCU t o USD (average) Recorded u nemp loymen t (%) Bal ance of paym ents (m ln USD ) Current acc ount balan ce Trade ba lance Exp ort valu e of good s an d services Imp ort valu e of good s an d services Servi ces balan ce In come b alanc e Transfer bal ance Net direct inves tment flows Net portfolio inves tmen t flows Net debt flows Other capital f lows (neg ativ e is fligh t) Chang e in inte rna tion al reserves External position (mln U SD ) Total foreign d ebt Short-term deb t Total debt service due, incl . sho rt-term d ebt Total foreign e xchan ge reserves Int ern ation al in vestment posi tion Total assets Total liab ilities Trad e bal ance (% of GDP) Current acc ount balan ce (% of GD P) Inward FDI (% of GDP) Forei gn d ebt (% o f GD P) Forei gn d ebt (% o f XGSIT) Int ern ation al in vestment posi tion (% of GDP) Debt service rat io (% of XG SIT) Int eres t se rvic e ra tio incl . arrears (% of XG SIT) FX-reserves import co ver (mon ths ) FX-reserves d ebt serv ice cover (% ) Liquidity rat io 1 337 13 565 29 656 07 1 989 97 -884 73 3 250 21 4 134 94 5 ,5 4 ,1 1 ,4 19,6 42,0 -13,0 20,6 1 ,3 11 30 3 15 8 1 483 41 628 20 675 58 2 103 17 -1 794 76 3 599 68 5 394 44 4,1 1,9 0,8 18,7 41,8 -22,7 19,1 1,6 10 311 150 1 87990 84880 80075 2 38882 -2 00948 4 51316 6 52264 3,1 0,6 0,4 21 ,2 46 ,3 -22 ,6 19 ,7 2,1 9 298 146 230059 111471 109896 262150 -232459 587643 820102 3,0 0,6 0,2 23 ,7 48 ,7 -24 ,0 23 ,3 2,4 9 239 140 222 676 94 669 139 551 201 148 na na na 0,7 -0,7 0,2 26 ,0 40 ,6 na 25 ,5 1,8 6 144 121 17 9830 6 5370 11 9120 15 0790 na na na 2,4 1,2 0,0 2 6,3 4 4,5 na 2 9,5 1,1 6 127 123 185160 75910 86410 152460 na na na 1,2 0,2 0,1 2 4,6 4 4,3 na 2 0,7 0,8 6 17 6 12 9 281 73 375 69 2 577 11 2 201 41 -80 46 10 82 -24 32 45 97 -22 83 80 07 52 20 437 14 149 81 326 84 2 889 71 2 562 87 -136 57 -15 63 -24 82 20 18 -117 28 145 95 -85 45 113 21 5385 27906 3 31842 3 03938 -18958 535 -4093 -4540 -32745 39477 20989 28566 5954 29409 378982 349573 -20 575 769 -3647 -13 696 -29 092 38756 21346 23268 -6 247 6 200 435 065 428 864 -16 745 4 598 -300 -11 044 -23 092 -10 874 -9 744 -61 001 7940 1 6180 31 9730 30 3550 -1 3180 5170 -240 -3580 -2 1090 -3 9210 5590 -5 0360 1840 9060 329960 320900 -12480 5520 -260 -4480 -17570 4080 17810 1670 0 ,7 22,6 3 ,6 -0, 6 3 ,6 114 5,32 3 ,7 0,6 24,7 3,3 3,1 2,7 10 24,1 2 3,7 0,4 27 ,6 4,2 4,4 2,2 9 54 ,79 3,5 3,8 29 ,4 4,8 0,3 2,5 929 ,26 3,3 0,3 28 ,1 4,8 3,8 4,7 1102 ,47 3,2 -3,5 3 2,3 2,5 -2,3 -0,6 1325 ,70 6,4 -2,9 3 4,6 2,6 1,8 0,3 1205,40 6,5 4 ,7 2 ,1 -0, 3 3 ,7 19,6 13,9 4,2 2,4 3,6 5,0 8,5 7,3 5,1 3,6 4,5 6,2 11 ,8 11 ,3 5,0 4,0 4,5 5,8 12 ,1 11 ,9 2,6 -1,7 0,6 4,3 6,2 3,3 -5,0 -15,0 -7,0 6,6 -13,6 -18,7 0,3 -3,1 1,6 4,5 -0,4 0,8 4 ,7 3 ,6 4 ,1 1 98997 4,2 2,7 1,9 2 10317 5,1 2,2 0,6 2 38 882 5,0 2,5 0,6 262 150 2,6 4,7 -0,7 201 148 -5,0 -0,6 1,2 15 079 0 0,3 0,3 0,2 15 246 0 2004 2005 20 06 20 07 200 8e 200 9f 2010f

Key rat ios for ba lanc e of paym ents, external solve ncy an d ext ern al li quidity

Source: EIU
Disclaimer
This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank Nederland, and regulated by the FSA. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy or completeness. It is for information purposes only and should not be construed as an offer for sale or subscription of, or solicitation of an offer to buy or subscribe for any securities or derivatives. The information contained herein is not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient. All opinions expressed herein are subject to change without notice. Neither Rabobank Nederland, nor other legal entities in the group to which it belongs accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith, and their directors, officers and/or employees may have had a long or short position and may have traded or acted as principal in the securities described within this report, or related securities. Further it may have or have had a relationship with or may provide or have provided corporate finance or other services to companies whose securities are described in this report, or any related investment. This document is for distribution in or from the Netherlands and the United Kingdom, and is directed only at authorised or exempted persons within the meaning of the Financial Services and Markets Act 2000 or to persons described in Part IV Article 19 of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2001, or to persons categorised as a “market counterparty or intermediate customer” in accordance with COBS 3.2.5. The document is not intended to be distributed, or passed on, directly or indirectly, to those who may not have professional experience in matters relating to investments, nor should it be relied upon by such persons. The distribution of this document in other jurisdictions may be restricted by law and recipients into whose possession this document comes from should inform themselves about, and observe any such restrictions. Neither this document nor any copy of it may be taken or transmitted, or distributed directly or indirectly into the United States, Canada, and Japan or to any US-person. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of Rabobank Nederland. By accepting this document you agree to be bound by the foregoing restrictions.

February 2009

Rabobank

Economic Research Department

Page: 11/11


				
DOCUMENT INFO