Eurozone woes, slower export growth, stronger won may affect financial markets


Every year has a theme, in retrospect, that helps explain what dominated the country’s economy. In 2011, the eurozone debt crisis was the undisputed prime culprit in putting a dampener on the Korean economy.

As the country rings in the new year, hopes are ripe that things will be different; unfortunately, the theme of 2012 might be dishearteningly familiar as the eurozone’s problems are expected to persist, casting a cloud over the global economy in general and Korean exports in particular.

“There’s no clue yet about how the eurozone debt issue will play out, but what’s certain is that this is the biggest problem (for the Korean economy),” said Oh Suk-tae, head of research at SC First Bank in Seoul.

What’s at stake is the growth of the Korean economy, Asia’s fourth-largest, and the outlook remains less than optimistic. The Finance Ministry’s growth forecast for 2012, for instance, is 3.7 percent in reflection of a slew of unfavorable factors that threaten the domestic economy.

The Bank of Korea’s forecast is also 3.7 percent, a downbeat figure that is causing worries among investors and policymakers, given that the country’s economy is already faced with a host of challenges such as mounting household debt and inflationary pressure. 

Slower exports

About half of Korea’s economy depends on exports, the very growth engine led by conglomerates such as Samsung, LG and Hyundai. A recent BOK report suggests that export growth “will slow considerably, owing to the cooling of world trade growth” this year.

Separately, the country’s export business survey index in December based on a poll of 979 Korean firms also projected that exports would decline in the first quarter of 2012.

Some analysts said the government’s policy line, which has long focused on export-driven growth, might shift this year, though the extent of change is, at best, a matter of speculation. The crucial parliamentary and presidential elections scheduled for the new year are likely to shed new light on the side effects of the export policy, said Jeon Min-kyu, economist at Korea Investment & Securities.

“In the past decade, the Korean government has maintained a mix of the cheaper Korean won and export-focused policy, but this only widened the income gap between the wealthy and the poor,” Jeon said.

The greater wealth gap and low income earners’ sense of being left behind in the wake of the country’s push for export-led growth might spark a shift in policy, particularly in tandem with the elections to seek more votes.

Possibility of rate cut

For much of 2011, policymakers including those at the central bank found themselves virtually helpless in tackling stubbornly high consumer prices that surpassed the target band of 2-4 percent inflation.

In December, the central bank kept the benchmark rate unchanged at 3.25 percent for the sixth straight month, citing the greater external risks including the turmoil in Europe.

Amid widespread views that the BOK had already lost a chance to raise the rate and tame inflation growth, the worsening of the eurozone debt problem almost wiped out the possibility of a rate hike as such a move could further undercut the country’s economic growth and add extra burden to debt-laden households.

As other central banks slashed their interest rates late last year to revive their embattled economies, expectations are building that the BOK could cut the rate as well to channel fresh energy to the economy, analysts said.

“The Bank of Korea is likely to slash the rate at least once, probably in the second quarter, as the economy is bound to slow down,” said Oh of SC First Bank.

Oh and other analysts cited the planned reshuffle of members of the Monetary Policy Committee in April as the turning point at which the BOK could opt for a rate cut.

Stock market volatility

The uncertainties in Europe are likely to cause another year of sharp fluctuations in the stock market. Strategists projected the benchmark KOSPI would trade at between 1,600 and 2,300 with the highs coming in the second half of the year.

Analysts at Korea Investment & Securities, Hyundai Securities and Woori Investment & Securities said the local bourse might get a boost if the U.S. Fed rolls out more stimulus measures, bringing more capital into stock markets in emerging markets and the KOSPI.

With the eurozone issue weighing down sentiment, investors witnessed a sharp fall of the local bourse when North Korean dictator Kim Jong-il died of a heart attack in mid-December, reigniting the topic of Korea’s geopolitical risk, also known as the “Korea Discount.” Some analysts, however, brushed aside such concerns.

“Investors have already factored in risks related to the European debt crisis and North Korea. The other main variable to KOSPI would be general business sentiment in the U.S. and China,” said Lee Sang-yoon, strategist at Hyundai Securities.

Lee said the first quarter would be the toughest for investors, and a breather is expected in the second half of the year when the U.S. economic recovery accelerates. Lee’s take on the possible band of KOSPI fluctuation is between 1,640 and 2,140.

Stronger Korean won

Foreign exchange dealers said the government’s policymakers might take a different approach to the foreign exchange market, possibly allowing for the Korean won to gain value against the U.S. dollar.

The country’s financial regulators reportedly took measures, including market intervention, to prevent the Korean won from appreciating too fast. This is chiefly to help exporters stay competitive in the global market with cheaper prices for their products.

This year, however, inflation and domestic spending might take precedence over the weakening of the won. A stronger local currency, the logic goes, tends to keep imported goods cheaper, encouraging Korean consumers to open their pockets.

Currency traders, including Woori Futures currency analyst Byeon Ji-young, said the won would trade between 1,025 won and 1,100 won against the greenback, with more betting the won to strengthen in the second half of the year.

Jeong Young-sik, research fellow at Samsung Economic Research Institute, said: “We expect that external uncertainties such as the debt problem in Europe might soften by the third quarter, which will trigger more capital inflow into emerging markets and lift up currencies in the region.”

Jeong forecast the won would hit as low as 1,080 won against the dollar in the first quarter and strengthen gradually up to 1,040 in the second half.

One important factor to consider is a faster drop of the U.S. dollar that would threaten its status as the world’s reserve currency, analysts said, adding that more volatility might hit the currency market should the dollar lose its strength further.

By Yang Sung-jin and Cynthia J. Kim
(insight@heraldcorp.com)
(cynthiak@heraldcorp.com)