South Korea’s post-impeachment blues color the economy uncertain
South Korean shares have continued double-digit gains on the Morgan Stanley Capital Index in the wake of the Constitutional Court’s endorsement of president Park Guen-hye’s impeachment on corruption charges. The ouster paves the way for fresh elections, despite ambiguous economic signals and a proliferation of diplomatic and trade disputes. A leadership vacuum will be in place until a successor is declared. Opposition party head Moon Jae-in is the overwhelming favorite with 30% backing in opinion polls, twice that of the second-place candidate. Jae-in has promised fiscal stimulus, as this year’s original 2- to 2.5% GDP growth forecast may not be met. And the next president must also deal with regional and bilateral confrontations to the north, and with China and the US.
Pyongyang’s missile tests and bellicose rhetoric have resisted global sanctions and China’s decision to cut off coal imports. Beijing is angry at Seoul for deploying aerial defenses and has retaliated through tourism and consumer-goods boycotts damaging chaebol bottom lines. Washington is miffed in particular over the imbalance in auto access under the free-trade pact. And in a letter to the Financial Times, Korean officials blasted allegations of currency manipulation, citing the US treasury department’s own recent assessment of intervention moves as only “disorderly.” Prior to the G-20 meeting in Germany, the South Korean finance minister urged rating agencies not to downgrade the sovereign in the face of these challenges, but the next president could face this setback immediately.
Daiwa Capital Markets has cut its growth projection to 1.75% at the lower range, despite a 10% export jump in electronics and handsets in February and good manufacturing data. China takes one-quarter of overseas sales and accounts for half of tourism. And Credit Suisse estimates that the travel ban alone imposed after installation of the THAAD missile system will shave one-fifth off the GDP. Foreign investors, who have maintained net inflows into stocks and bonds, have shunned listings such as Lotte Group in the retail sector suffering most from the consumer boycott, while loading up on arms makers and suppliers. They have also rotated to relatively insulated commercial property investment, with 5% real yields, according to industry experts.
The government offered 200 billion won in emergency loans to businesses affected by Chinese retaliation, but central-bank rate reduction has been off the table over concern about the US$1 trillion household debt, and the US Federal Reserve’s interest-rate hike. Domestic demand has been soft as disposable income continues to fall at the fastest pace since the 2009 crisis, with a 1% drop in the October-December quarter. The setback has hit individual investors at the same time as the small-company $160-billion Kosdaq stock market is looking to expand the domestic and global buyer and issuer bases. Retail allocation represents 90% of activity, and exchange officials recently announced forays into Southeast Asia to lift the international profile.
The central bank’s latest financial-stability report noted that household credit was up 12% in the last quarter, but that the spurt may have peaked a year ago as regulators just introduced new curbs on the non-bank sector for such “high-risk” exposure. On the corporate front, commercial-bank net income tumbled one-third in 2016 on restructurings and losses associated with shipbuilding and other industries. Returns on assets and equity were the lowest in 15 years, and the loss at the Korean Development Bank, which is deciding on a bailout for Daewoo Shipping after Hanjin’s bankruptcy, was the biggest since the late-1990s meltdown. As one of the biggest issuers of emerging-market external debt, its bonds have come under pressure despite a broad asset-class rally through March.
Finance Minister Yoo Il-ho, due to be replaced by the next administration, vowed “swift and resolute action” against accumulated internal and outside risks, including “frontloaded” government spending. He advised foreign investors to remain “calm” after the impeachment, which rating agency Moody’s described as “removing political uncertainty.” The central bank doubled a currency-swap accord with Australia to $8 billion as another line of defense, but post-election economic lethargy may set in to mar new generation leadership and stock-market runs.