Economic gravity pins Korea moon shot

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Korean stocks up 45% on the MSCI Index, alongside a 10% won gain against the dollar, continued to lead Asia through November with a central bank 25 basis point rate lift and border bellicosity with the North barely denting momentum. Tech companies like LG and Samsung jumped over 50%, mirroring sector outperformance in global emerging markets and 5% country computer and semiconductor export expansion. Despite President Moon Jae-in’s push to raise corporate governance standards at the dominant chaebol conglomerates, the “Korea discount” remains in place with the average price-earnings ratio under ten times, at odds with an estimated 50% profit surge this year.

Third-quarter GDP growth was a torrid 5.8% annualized, with a consumption boost on the back of a reflationary budget due to inject billions of dollars into infrastructure and social programs and hoist the minimum wage 15% after it was frozen for decades. The government claims it will not create deficits and argues that stimulus and structural reforms, especially more flexible labor markets and education and regulatory moves to hike productivity, can foster a “paradigm shift” evading the long-term stagnation experienced in major competitor Japan. However, a November central bank survey of domestic and foreign investors still named household debt, with near 10% growth over the quarter, as the top risk, as the IMF weighed in during recent consultations on “urgent” financial services diversification and liberalization beyond the outlined official blueprint.

A November central bank survey of domestic and foreign investors still named household debt, with near 10% growth over the quarter, as the top risk, as the IMF weighed in during recent consultations on “urgent” financial services diversification and liberalization beyond the outlined official blueprint

With the cyclical trade rebound, economic growth is forecast at 3% this year and next, while inflation stays below the 2% target. The manufacturing PMI index is at a neutral 50, in part reflecting offsetting forces including higher oil import prices, the likelihood of US bilateral free trade pact renegotiation, and the fallout from China’s retail and tourism boycotts in place until recently in protest over Seoul’s anti-missile defense. Beijing’s visitor ban from January-September cost an estimated $7 billion, according to parliamentary figures. The Chinese share of Korean exports is 25%, double the American one, and Seoul runs a bilateral surplus and overall sales through the third quarter were roughly the same as in 2016. However, with the partner tensions it has begun to emphasize greater ASEAN ties, with Moon traveling to Indonesia in November to sign construction deals under his “New Southern Policy.”

Consumer confidence rose before the benchmark rate nudge to the highest level since 2010, as household debt hit $1.3 trillion, or 85% of GDP, despite a raft of bank loan-to-value limits imposed in recent months. It soared 35% over the past three years, according to the Financial Services Commission, which tightened mortgage guidelines at the end of November. At the same time, low-income borrowers received relief under a “happiness fund” if they owe less than $10,000 and attempted to repay the past decade. The IMF, in its latest Article IV mission, praised the “macro-prudential” measures but cautioned that credit card and personal debt is a “main financial risk.” Experts argue that a comprehensive solution must be found to these exposures lingering since the late 1990s crash, and a special task force appointment akin to the “chaebol sniper” for restructuring companies may be under consideration.

As the government horse-trades with opposition parties to win final approval of the 2018 budget plan, the Fund also released a working paper on a proposed new financial system framework to break with the long history of “state control or interference unrelated to safety and soundness.” It noted that these practices endure despite full bank privatization in principle, resulting in limited competition, over-collateralization, and poor project evaluation. Deregulation to expand small and midsize business credit access in particular is pressing, as they are “rationed” with short-term borrowing at 70% versus the 45% OECD average.

The study recommends a wholesale revamp of the Korea Development Bank’s governance and portfolio, which could reduce heavy external bond issuance as an emerging market stalwart. It suggests a “lower bar” in capitalization and sales for venture firm public listing through the second-tier KOSDAQ market, which has spurted 20% since September and drawn record net foreign inflows. The giant national pension fund may soon ratchet equity allocation there from 2% to 10% of the total, but it has been a “speculative playground” in one local broker’s words despite fresh paradigm talk for years in that confined realm.

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