South Korea riskier but panic button out of sight

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By:
Jeremy Weltman
Published on:

Political turmoil is heightening investor risk and will likely narrow the risk score differential with Japan, but a strong macro-fiscal situation should not be overlooked.

South Korea escalator-R-600
Going up or down? South Korea is riskier but a hands-off approach for
investors doesn’t appear necessary

Bogged down by a damaging corruption scandal bringing hundreds of thousands of protesters to the streets, president Park Geun-hye’s days would seem to be numbered with her approval ratings plunging to a mere 5%.

The embattled leader saw her party lose its majority in Parliament in April, prompting a downgrade to the government stability indicator score.

Six months on, and her remaining 15 months in office now seems purely academic as investors must brace themselves for early elections and a period of stalled policymaking.

ABN Amro senior economist Arjen van Dijkhuizen says the spring election results and the latest scandal make it almost impossible for Park to push through her legislative reform agenda.

This will slow down the reforms required to address structural issues, including the inadequate governance of inefficient state-owned enterprises, the nation’s waning competitiveness and rising household debt.

“Strong differences of opinion between the main parties on which policies are needed to target the current set of economic problems are preventing the setting of a credible and pro-active policy agenda and are leading to policy paralysis,” says Van Dijkhuizen.

That might make Japan – hitherto riskier than Korea – a safer bet when the Q4 survey results are released early in 2017:

ECR-sOUTH-kOREA

Dissecting macro-trends

Korean exports are struggling, too, undermining the manufacturing sector. China’s growth outlook is one reason; another is competition from China as it moves up the value chain.

Added to that are concerns about the protectionist policies the US president-elect Donald Trump might be planning, his foreign policy for the Korean peninsula, and the corporate defaults affecting the Korean shipbuilding industry.

Consequently, some of Korea’s economic risk indicators have been downgraded this year, with labour market/industrial relations also a weak aspect of the risk profile.

Yet the IMF is predicting 3% real GDP growth for 2017, inflation of 1.9%, a current-account surplus of 5.9% of GDP and a low unemployment rate of 3.3% – which are hardly warning signs of major risk ahead.

Indeed, Korea scores higher than Japan on all the economic risk indicators, bar bank stability, which is only slightly lower and is still a decent score of more than six out of 10.

Meanwhile, the budget deficit has crept higher in recent years, to 3% of GDP in 2015, but government debt is only 35% of GDP, giving the government plenty of scope and time to stop the rot.

Van Dijkuizen also believes Korea is relatively well-placed to cope with (external) shocks such as the ongoing slowdown in China, the rapid increase of advanced economies’ bond yields and rising protectionism.

“This is reflected in the country’s strong external ratings, which are one of emerging Asia’s best,” he says. 

Thus, although other survey contributors wishing to remain anonymous expect to downgrade their country risk scores, Korea shouldn’t be counted out just yet.

The borrower remains comfortably within ECR’s second of five tiers, presently in 22nd place, and is safer than other similarly rated AA sovereigns, including France and Kuwait.

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