Updated 13 Feb-2014

Korea

 

INVESTMENT VIEW

  • What’s new?

    • FX: Year-to-13 Feb, the KRW is down approx. 3.8% vs. the JPY, following a 23% gain in 2013.

    • Rates: KTB yields remain near the lowest level since Nov-2013.

  • What’s next? 

    • FX: ... 

    • Rates: KTB yields are likely to be stable as the market takes its cues from the Fed's tapering program.

  • Quick links:

 

ISM falls (Jan-2014)

ISM falls (Jan-2014)

 

KEY ISSUES + CONTEXT

 

Monetary Policy

 

  • What's new?: BoK Governor Kim and the monetary policy board held the seven-day repurchase rate steady at 2.5% (13 Feb), in line with expectations.

  • What's next?: The press is likely to speculate on who President Park will nominate to succeed BoK Governor Kim, who departs on 31 Mar-2014. Local media have flagged nearly 20 possible candidates while President Park hasn’t dropped any hints regarding a shortlist. The nominee will face a parliamentary hearing, a first in the BoK's 64-year history, as well as added scrutiny after Pres. Park’s four past nominees backed out following graft allegations (Mar-2013). Soon after, Pres. Park would need to appoint another replacement, for BoK monetary policy board member Lim Seung Tae, whose term ends 14 Apr-2014.

  • How'd we get here?: The BoK's last rate move was a 25bp-cut in the 7-day repo rate (May-2013).

  • Quick links: 7-day repo 

 

External Debt

 

  • What's new?: The blister in in Korea's relatively strong External Account position is its high short-term private external debt stock, which may increasingly garner the attention of investors. South Korean construction industry data (revealed 12 Feb) showed that KRW 5.23trn (USD 4.9bn) in debts sold by 24 local companies are due in 2014, or which KRW 2.04trn (39%) will mature in Mar/Apr-2014. 

  • What's next?: While maturing external debt may pose systemic risk, prospective BoP outflows should also be viewed against a generally strengthening onshore foreign currency liquidity position. Foreign currency-denominated deposits held by residents reached USD 49.2bn (end Jan-2014), according to the BoK.

  • Investors are taking a closer lookFinancially troubled South Korean construction firms are expected to refinance a large sum of debts due in March and April, industry data showed on Wednesday, raising concerns that their already shaky footing could further worsen.According to the data, a total of 5.23 trillion won (US$4.9 billion) in debts sold by 24 local construction companies are due this year, around 2.04 trillion won, or 39 percent, of which are scheduled to mature in March and April.The data showed that 11 builders have to refinance 783 billion won worth of debts due in March with eight construction firms facing 1.26 trillion won worth of maturing debts in April... 

  • How'd we get here?: ... 

 

 

Seoul-Pyongyang Relations: North-South relations thaw, but security issues threaten planned family reunions

 

  • What's new?: South and North Korea ended (13 Feb) their first high-level talks in seven years without any progress. The North called on South Korea to delay the military exercises until after the reunions of families separated by the 1950-53 Korean War (planned for 20-25 Feb in Mount Kumgang, DPRK). The South has rejected this request, noting that family reunions should not be linked to the military exercises, which it says is defensive in nature, while the North condemns them as a rehearsal for a nuclear war.

  • What's next?: US-Korea join military exercises are likely to go on as planned (24 Feb through Apr-2014), which could cast doubt whether the sides can hold the reunions as scheduled. . 

  • How'd we get here?: Bilateral ties plunged sharply in 2013 after the North carried out a third nuclear test and threatened to launch nuclear attacks against the South and the United States.

  • What do others say?:

    • "We maintained our stance that we cannot accept the demand, because linking the South Korean-U.S. military exercises to family reunions violates the principle that a military issue cannot be linked to a purely humanitarian issue,” the ministry said today in an e-mailed statement." - Unification Ministry (13 Feb, Bloomberg)

 

 

OTHER KEY ISSUES

 

  • Equity market (under)performance: Q4 net income in South Korea has so far trailed estimates by 29 percent, Morgan Stanley wrote in a Feb. 12 report. The 74 percent of Kospi index companies that trailed analysts’ expectations compares with an average of 52 percent during the past seven years, data compiled by Bloomberg show. The Kospi is valued at 9.3 times analysts’ estimate for 2014 earnings, in line with the MSCI Emerging Markets Index, according to data compiled by Bloomberg. The Korean gauge was trading at an 8 percent discount 12 months ago.

    • Earnings projections for South Korea are still too high. Net income will probably grow between 6 percent and 7 percent this year, versus the consensus analyst estimate of 24 percent. - You Seung Min, Samsung Securities chief strategist (13 Feb, Bloomberg)

  • Growth: President Park Geun-hye has announced a "three-year economic innovation plan" (Jan-2014). Under the plan, the president aims to raise the country's growth potential to 4%, hike the overall employment rate to 70% and increase annual per-capita income level to US$40,000. More details regarding implementation are expected in Feb-2014.

  • International trade: In the US-led regional free trade pact known as the Trans-Pacific Partnership (TPP), Korea has been holding "preliminary talks" to check conditions for its participation in the TPP with eight of the 12 countries that are currently taking part in negotiations. 

    • Top quotes:

      • FTA negotiator, Choi Kyong-lim said "Holding preliminary talks with all participating countries does not mean we are ready (to make a decision). Different countries have different conditions, and thus some may require two or even three rounds of talks. Our hope is to complete the process at the earliest date possible, but there is no guarantee that the process will be completed in the near future or before the end of March." (12 Feb, Yonhap)

  • Fiscal accounts: For FY 2013, the government posted a deficit of KRW 755bn.

  • Domestic politics

  • Regional relationships: Korea-Japan relations are cold. Popularity for the Japanese PM Abe among Koreans is as low as that for DPRK leader Kim Jong-un (12 Feb, Yonhap) due to his administration's nationalist remarks, recent actions (Dec-2013 visit to the Yasukuni war shrine) and Japan's renewed attempts to claim the easternmost South Korean islets of Dokdo. ...

 

 

KEY RESOURCES

 

 

 

News Scan ("Korea")

 

 

Recent News

  • ... (..., ...)

 

What do others say? Selection of remarkable quotes + views from commentators worth following:

 

Equity markets:

  • "Earnings projections for South Korea are still too high. Net income will probably grow between 6-7% this year, versus the consensus analyst estimate of 24%." - You Seung Min, Samsung Securities chief strategist (13 Feb, Bloomberg)

  • "It’s one of the worst in Asia" this earnings season. "Our current overweight in Korea stands, but it seems to be questioned by this earnings trend." - Manishi Raychaudhuri, Asia-Pacific equity strategist at BNP Paribas (13 Feb, Bloomberg)