MONTREAL - Negative, even tragic, events have dominated recent news from the
Korean Peninsula, yet the resilience of the South Korean economy, aided by
government stimulus packages, has helped the equity markets to shrug off
personal tragedy and war threats alike.
Over the space of a few days, Koreans faced the suicide of former president Roh
Moo Hyun; North Korea's nuclear test on May 25 followed by saber-rattling
threats of invasion; the uncertain political situation in Pyongyang as the
prospects increased of a change in leadership in the north; and the sentencing
in the North this week of American journalists to 12 years of hard labor.
Despite this onslaught, the South's main equity market index, the
KOSPI, has continued to rise, although stalling lately, up 38.7% from its early
March low of just over 1,000 into the 1,420s this week. Even a 6% decline in
response to the nuclear test was reduced by half the same day and all the drop
was made up within the week.
The advance follows a 16-month decline of just over 50% from the all-time high
of 2,065 on October 31, 2007. The index looks due for a retracement of its
recent advance rather soon, falling perhaps into the 1,200s, but from a pure
technical-chart perspective it should rebound still more strongly after that.
In May, the country's consumer price index rose at the lowest rate in nearly
two years, up 2.7%, while the central bank appears on course to keep the rate
close to 3% for the current calendar year. A supplementary stimulus package
approved by parliament at the end of April looks to spend US$13.8 billion on
infrastructure, loan facilitation and cash giveaways, on top of $40 billion
previously allocated.
South Korea's gross domestic product (GDP) grew, albeit infinitesimally, during
the first quarter of 2009 (under 0.1% but still positive), thanks to a relative
recovery in the electronic sector. The chemical, metals and automobile sector
also contributed to this performance, which appears, however, to be due largely
to restocking orders, following a 5.1% GDP decline in the last quarter of 2008.
A domestic fiscal stimulus package helped the construction sector as well.
Even so, the economy still looks fragile and may shrink this year, with most
current estimates ranging between a 2.4% and a 4.2% decline.
Economist Nouriel Roubini, of New York University, speaking to a conference in
Seoul at the end of last month, was according to Bloomberg News more
optimistic, observing that the data "suggest there is the beginning of an
economic recovery, and growth might be already positive in the second quarter".
The state-funded Korea Development Institute (KDI) in Seoul warns, however,
against the belief in a "meaningful recovery" anytime soon. It notes continued
weakness in demand and employment, recent signs of stabilization
notwithstanding, and opines that it is still "too early to say that overall
economy is starting to pull out of the recession".
Certainly, leading economic indicators other than the equities market show
continuing weakness. Private debt restructuring being necessary if not critical
for long-term financial stability (structural reform being almost as
important), the KDI recommends against significant modifications of
macroeconomic, microeconomic or institutional policies, particularly in view of
the Korean economy's export dependence and the uncertain international
situation.
KDI's projections for the South Korean economy are on the slightly more
optimistic side of the general consensus for 2009 and 2010. Yet the national
economy remains overly dependent upon North American consumer behavior and
domestic demand has less ability to take up the slack than appears to be the
case in, for instance, China.
A continuing credit crunch both domestically and internationally will not help
matters, and the recently rising price of oil poses a threat for the future.
That said, industrial production in April, while down 8.2% from the same period
a year earlier, was up for the fourth month in a row with a 2.6% rise from the
previous month. Business expectations for continued manufacturing growth are
the highest since last September.
The KOSPI, now barely above the level it achieved at the beginning of last
month, could continue moving sideways rather than retracing to lower levels.
The 1,400-1,500 range represents a broader interval of resistance, and the
index has been content to remain within that range though towards its lower
bound without seeking to challenge the upper one. After 1,500, the next
resistance interval is the 1,590-1,620 range.
Meanwhile, the long-term descending-tops trend-line governing the KOSPI's
descent beginning towards the end of 2007 currently passes through the 1,565
level and will decline to 1,551 by the end of the month. This sets up a major
test of the South Korean market's recovery for the medium-term future.
Continuing to tread water through a sideways correction over time, rather than
a more canonical decline, is therefore not the worst possibility in preparation
for that test.
Dr Robert M Cutler (http://www.robertcutler.org), educated at the
Massachusetts Institute of Technology and the University of Michigan, has
researched and taught at universities in the United States, Canada, France,
Switzerland, and Russia. Now senior research fellow in the Institute of
European, Russian and Eurasian Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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