Economics

South Korea chart book

An improving cycle vulnerable to trade wars
Group Research May 14, 2019

30
Ma Tieying
Economist

Please direct distribution queries to

Violet Lee +65 68785281 violetleeyh@dbs.com

Charts of the month

• Encouraging signs abound from recent exports, PMI, business, and consumer confidence indicators.
• Chances are high that GDP growth will rebound modestly in 2Q after a temporary contraction (QoQ) in 1Q.
• The return of China-US trade tensions, however, creates new uncertainties.
• The easing of inflation/property prices provides the flexibility for the Bank of Korea to cut rates to support
growth. An escalation of trade tensions could prompt the BOK to move.
• The KRW is facing depreciation pressure not only due to economic weakness, but also the fragile market
sentiment caused by trade tensions and geopolitical risks.
• We maintain our GDP growth forecasts at 2.1% for 2019 and expect a 25bps rate cut in 3Q.

South Korea: Exports by key products South Korea: Nominal and real interest rates
% YoY % YoY % pa, YoY 7D repo rate
80 Semiconductors (LHS) 250 3.00 CPI
Automobiles (LHS) Repo rate - CPI
2.50 CPI target: 2%
Vessels (RHS) 200
60
2.00
150
40 1.50
100 1.00
20
50 0.50

0 0.00
0
-0.50
-20 -50 -1.00

-40 -100 -1.50

2017 2018 2019 2016 2017 2018 2019

Refer to important disclosures at the end of this report.

South Korea chart book – An improving cycle vulnerable to trade wars May 14, 2019

High-frequency indicators – Exports

Exports continued to contract in April, but the pace has The decline in exports to China has narrowed to single
eased notably versus 1Q (-2.0% YoY, vs -8.6%). digit rate (-4.5% in April vs -17.3% in 1Q), in line with the
recent signs of stabilisation in the Chinese economy.

South Korea: Export growth South Korea: Exports by key market

% YoY % YoY
65 China US EU Japan
35
30 55
25 45
3mma
20
35
15
10 25
5 15
0 5
-5
-5
-10
-15 -15
-20 -25
2016 2017 2018 2019 2017 2018 2019

The decline in semiconductor exports has moderated for Manufacturing PMI returned to the expansionary territory
the second month in a row, supporting the case of a in April (50.2), for the first time over half a year. New
cyclical bottom in the tech sector. orders, output and employment improved the most.

South Korea: Exports by key products South Korea: Manufacturing PMI

% YoY % YoY Index, 50=neutral
80 Semiconductors (LHS) 250
Automobiles (LHS) 52
Vessels (RHS) 200
60 51
150
40 50

100 49
20
50 48
0
0 47
-20 -50 46

-40 -100 45
2017 2018 2019 2016 2017 2018 2019

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South Korea chart book – An improving cycle vulnerable to trade wars May 14, 2019

High-frequency indicators – Domestic demand

Consumer confidence has risen above the neutral level in Business sentiment has also picked up, thanks to the
April, for the first time over seven months. Expectations broad improvement in the outlook for new orders,
for general economic outlook and employment conditions production, export sales, and domestic sales.
rose the most, helped by the government’s stimulus.

South Korea: Consumer confidence & retail sales South Korea: Business sentiment & capex indicators
% YoY point % YoY Core machine orders (LHS) Index
10 Retail sales (LHS) 115 50 Equipment investment (LHS) 85
Consumer confidence (RHS) Business sentiment (RHS)
40
8
110
30 80
6
105 20

4 10 75
100
0
2
-10 70
95
0
-20

-2 90 -30 65
2017 2018 2019 2017 2018 2019

Government spending increased strongly in 1Q, thanks to Labour market conditions have begun to improve, as
the expansionary fiscal policy and front-loading of FY19 evidenced by the decline in unemployment rate and the
budget. Stimulus effects could last into 2H, given the rise in labour participation.
proposal of a KRW 6.7tn supplementary budget in April.

South Korea: Central government expenditures South Korea: Labour market indicators
% YoY, ytd %, sa Unemployment rate (LHS) %, sa
30 4.4 Labour participation rate (RHS) 63.5
4.3
25
4.2
20 4.1
4.0
15 63.0
3.9
10 3.8
3.7
5
3.6
0 3.5 62.5
2016 2017 2018 2019 2016 2017 2018 2019

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South Korea chart book – An improving cycle vulnerable to trade wars May 14, 2019

Monetary

Inflation pressure has remained muted. Headline and core Housing prices have maintained an easing trend, led by
CPI stood at 0.6% YoY and 0.9% respectively in April, both the Seoul area; reflecting the effects of the government’s
below the central bank’s 2% target by a wide margin. cooling measures introduced since late-2018.

South Korea: CPI and PPI inflation South Korea: Housing prices
% YoY % YoY % YoY
4 6
CPI (LHS) Core CPI (LHS) PPI (RHS) 12 Nationwide

4 Seoul
10
3
2 8

2 0 6

-2 4
1
-4 2

0 -6 0
2016 2017 2018 2019 2016 2017 2018 2019

With real interest rates turning positive and back to the The expansion in household debt poses a potential hurdle for
normal levels, there is adequate room for the Bank of monetary easing. Bank lending to the household sector has
Korea to loosen monetary policy. slowed to single digit rate, but still outpaced GDP growth.

South Korea: Nominal and real interest rates South Korea: Bank loan growth
% pa, YoY 7D repo rate % YoY
3.00 CPI
16 Total Corporate Household
Repo rate - CPI
2.50 CPI target: 2%
14
2.00
12
1.50
10
1.00
8
0.50
6
0.00
-0.50 4

-1.00 2

-1.50 0
2016 2017 2018 2019 2016 2017 2018 2019

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 South Korea chart book – An improving cycle vulnerable to trade wars May 14, 2019

Capital flows

Current account surplus has narrowed due to weak Foreign inflows into Korean equity and bond markets
exports, but still equivalent to a sizeable 4.5% of GDP as have remained buoyant as of April, despite the negative
of March (sa, 12-month rolling basis). news flows e.g., Samsung’s poor earnings results, Norway
sovereign wealth fund cutting exposure to EM bonds.

South Korea: Current account balance South Korea: Foreign equity and bond inflows
USD bn Goods Services Current account KRW bn Equities Bonds Total
15
6000
13
11 4000
9
2000
7
5 0
3
1 -2000

-1
-4000
-3
-5 -6000
2016 2017 2018 2019 2016 2017 2018 2019

The KRW’s depreciation vs the USD has accelerated since The KRW has depreciated not only against the USD this
the second half of April, probably due to the 1Q GDP year (-5.5% YTD), but also against the currencies of major
shock, and subsequently, North Korea’s missile tests, and trade partners (KRW REER: -2.5% in Jan-Mar).
the return of China-US trade tensions.

South Korea: USD/KRW spot vs KOSPI South Korea: KRW real effective exchange rate
2010=100
2600 KOSPI (LHS) 1050
135
USD/KRW (RHS) REER
2500 130
125
2400 +1 SD
1100 120
2300 115
110
2200 105
1150 100
2100
95 -1 SD
2000 90
85
1900 1200 80
Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 2000 2003 2006 2009 2012 2015 2018

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South Korea chart book – An improving cycle vulnerable to trade wars May 14, 2019

Domestic and foreign debt

The expansion in domestic household debt is a potential External debt coverage remains strong. External asset-to-
source of financial instability risks. Household debt-to- external debt ratio and foreign reserve-to-short term
GDP ratio has hit a record 100% as of end-2018. external debt ratio stood at 2.1 and 3.2, respectively, at
end-2018.

South Korea: Public and private debt South Korea: External position
% of GDP USD bn
1000 External assets
300 External debt
900 Foreign reserves
Government
250 800 ST external debt

700
200
600

150 Corporate 500

400
100 300
200
50
Household 100
0 0
2009 2011 2013 2015 2017 1Q09 1Q11 1Q13 1Q15 1Q17

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South Korea chart book – An improving cycle vulnerable to trade wars May 14, 2019

Forecasts on major indicators

GDP CPI inflation

2017 2018 2019f 2020f 2017 2018 2019f 2020f
Annual change (%, YoY) 3.1 2.7 2.1 2.4 1.9 1.5 1.1 1.5

Exchange rate and interest rates forecasts

1Q19 2Q19f 3Q19f 4Q19f 1Q20f 2Q20f 3Q20f 4Q20f
USD/KRW eop 1137 1170 1180 1170 1165 1160 1155 1150
Benchmark
(%, eop) 1.75 1.75 1.50 1.50 1.50 1.50 1.50 1.50
repo rate
3M CD rate (%, eop) 1.90 1.90 1.76 1.76 1.76 1.76 1.76 1.76
3Y (%, eop) 1.69 1.75 1.75 1.75 1.75 1.75 1.75 1.75
Government
10Y (%, eop) 1.83 1.95 2.05 2.05 2.05 2.05 2.00 2.00
bond yields
10Y-3Y (bps) 14 20 30 30 30 30 25 25

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South Korea chart book – An improving cycle vulnerable to trade wars May 14, 2019

Group Research
Economics & Strategy

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
+65 6878-9548 taimurbaig@dbs.com

Nathan Chow Radhika Rao

Strategist - China & Hong Kong Economist – Eurozone, India, & Thailand
+852 3668-5693 nathanchow@dbs.com +65 6878-5282 radhikarao@dbs.com

Masyita Crystallin, Ph.D. Irvin Seah

Economist – Indonesia & Philippines Economist - Singapore, Malaysia, & Vietnam
+62 21-2988-4003 masyita@dbs.com +65 6878-6727 irvinseah@dbs.com

Joanne Goh Samuel Tse

Regional equity strategist Economist - China & Hong Kong
+65 6878-5233 joannegohsc@dbs.com +852 3668-5694 samueltse@dbs.com

Eugene Leow Duncan Tan

Rates Strategist - G3 & Asia FX and Rates Strategist - Asean
+65 6878-2842 eugeneleow@dbs.com +65 6878-2140 duncantan@dbs.com

Chris Leung Philip Wee

Economist - China & Hong Kong FX Strategist - G3 & Asia
+852 3668-5694 chrisleung@dbs.com +65 6878-4033 philipwee@dbs.com

Ma Tieying, CFA
Economist - Japan, South Korea, & Taiwan
+65 6878-2408 matieying@dbs.com

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations).

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