South Korea: Strong fundamentals continue to support the won - BBH

Masashi Murata, Research Analyst at BBH, explains that the Korean economy has continued to grow as the Q3 GDP rose 3.8% y/y, the highest growth since Q1 2014.

Key Quotes

“Private consumption has improved moderately and investment continues to keep expansion strong. Net exports have been steady thanks largely to the global economic recovery, especially improved conditions in the Chinese economy. The economy is expected to continue its solid growth. President Moon suggests the government will continue its expansionary fiscal policy. The Bank of Korea (BOK) forecasts the economy to grow well over 3% this year on the back of strong exports.”

“The current account surplus peaked but has been steady in spite of a strong won and oil price rises. The current account surplus of GDP is expected to drop to 5.6% in 2017, down from 7.0% in 2016 but still much higher than Japan and China.”

“Inflation pressures have been modest in Korea. Its November headline CPI slowed to 1.3% y/y from 1.8% y/y in October, below the 2% target. Its core CPI rose 1.2% y/y, the lowest rate since December 2016.”

“BOK hiked rates by 25bp to 1.50% in November, which was the first hike since June 2011. The modest inflation pressure is likely to make BOK cautious with respect to additional rate hikes. BOK emphasized that inflationary pressures on the demand side will not be elevated for the time being.”

“The won has been solid in 2017 under strong Korean fundamentals. USD/KRW had dropped to 1076, which is the lowest amount since May 2015. S&P said that it would consider raising South Korea’s sovereign credit rating if North Korea is sincere about stopping its provocative acts. Developments between the US and North Korea might be a risk to the won.”