Korea feels impact of global uncertainty
By Robert M Cutler
MONTREAL - South Korean President Lee Myung-bak agreed at a summit meeting with
Japanese Prime Minister Yoshihiko Noda this week to expand bilateral currency
swaps in order to counter the economic risks to Seoul arising from global
uncertainties. The agreement drove South Korea's currency, the won, to a
one-month high against the US dollar.
A currency swap may take several forms for a couple of purposes. In this
instance, it is a foreign-exchange agreement in which two parties exchange
units of their respective currencies for the purpose of decreasing exposure to
exchange rate fluctuations.
On Tuesday, the won was up as much as 1.5% to an intraday
high of 1,128.53 to the US dollar, but has lost ground since then in the wake
of continuing developments in the European sovereign debt crisis. The won lost
9% against the dollar in September.
"We should strengthen our financial and currency cooperation to preemptively
stabilize the financial market as the world's economic uncertainty is
deepening," Lee said at a joint press conference. The new swaps would increase
the present levels to the equivalent of US$70 billion, or over five times what
is now the case.
The two leaders also agreed to seek new impetus to their bilateral free-trade
negotiations, which have been on hold over issues to do with agriculture and
fish. This development comes in the wake of the US Congress approving a
free-trade agreement with South Korea earlier this month. (Seoul has yet to act
on the agreement, and there is opposition in the National Assembly, where the
text may be altered before ratification.) Free-trade negotiations between South
Korea and Japan were started in 2003 but broke down in 2004.
The two countries have, in their various political incarnations, been military
and diplomatic rivals for centuries, even though they are economic partners
today. The Japan-Korea Annexation Treaty of 1910 legitimated the Japanese
occupation of Korea, which lasted until the Japanese Empire's defeat in World
There is still a territorial dispute between the two over a set of small
islands but as a symbol of political goodwill, Noda returned five volumes of
royal documents that the Japanese took from Korea during the occupation - 1,200
more volumes will reportedly follow.
The South Korean economy has been having trouble lately, reflected in the
bellwether KOSPI stock index, which closed Thursday at 1,805, down 17.2% in
three-and-a-half months. It is down 18.5% from its all-time high (on April 25
of this year) of 2,216. Short-term technical indicators have recently turned
positive, but the medium term is still ambiguous at best, and the stock index
will encounter technical resistances all the way into the low 1,900s, if it
makes it that far.
The Bank of Korea last week left its rate unchanged at 3.25%, citing downside
risks of external origin - South Korea is the most susceptible of all Asian
economies to any "contagion" from a catastrophic European debt crisis - even as
the inflation outlook worsened despite declines in economic activity.
Inflation in August hit a three-year high of 5.3%, and while it declined in
September to 4.3% inflationary expectations remain high. South Korea's
Purchasing Managers Index (PMI) fell to 47.5 in September from 49.7 in August,
which was in turn down from 51.3 in July. The neutral PMI level is 50; a higher
number indicates economic expansion, a lower one economic contraction.
Industrial production rose, suggesting a trend towards stabilization, but new
orders fell at the fastest rate in a year and after a strong first six months
this year there is now the risk of an extended slowdown despite some
still-strong sectors such as automobile manufacturing. Supply chain disruptions
resulting from the Japanese earthquake have been largely remedied, but demand
for South Korean exports remains relatively weak among developed economies.
There is now a consensus that the global economic slowdown will constrain South
Korea's real economic growth rate. The Samsung Economic Research Institute
estimates growth in 2012 at 3.6%, under the estimated potential of 3.8%,
according to Yonhap News Agency. Estimates by economists outside South Korea
are in the 3.4-3.5% range.
The current economic problems come at a difficult political time for South
Korean president Lee. National Assembly elections are due next April and,
limited to one term by the constitution, he will step down before a
presidential election in December. His Grand National Party holds 37% of the
seats in the National Assembly, leading a conservative bloc with two other
parties comprising 58%.
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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