FTA Passage’s Passing Glance

After 5 years of stalemate the US Congress in one swoop approved pending free trade agreements with Korea, Colombia and Panama coinciding with a state visit to Washington by Korean President Lee, briefly moving financial markets which had long ago latched on to bigger economic issues. The Seoul accord had been originally scheduled for signing during its hosting of last fall’s G-20 meeting, but lingering loopholes over financial services, autos and agriculture were in dispute. Foreign banks have been sensitive to rigid labor practices, with Standard Chartered recently facing a high-profile walkout over proposed changes, while the Texas-based Lone Star Funds’ controversial takeover and subsequent sale of a major local lender has brought both diplomatic recriminations and criminal charges. Recently the Achilles heel of private sector reliance on short-term external debt was again on display as the won nosedived 10 percent in September on heavy debt and equity selling led by Europeans. Despite the re-imposition of withholding tax, foreign investors who have traditionally been active stock buyers have moved into bonds to the extent of taking almost one-fifth the total. International reserves have recovered from 2008’s contingency to surpass $300 billion, but the ratio of near-term obligations to the amount was 200 percent at mid-year, according to the central bank. European banks supply near 40 percent of funding to the sector, and stress-tests were ordered by the regulator to examine the effects of an overseas borrowing squeeze as the continent attempts to sort out its liquidity-solvency predicament. The inspections began just after tumbling housing prices forced a rescue of specialized saving banks that operate in jurisdictions across the country. In the capital anger over the property plunge has promoted the candidacy of an entrepreneur without political party affiliation as mayor. Industrial output and exports are also down as interest rates hold firm.

Colombia and Panama were both strong performers on the EMBI before the FTA endorsement, as the former was lifted by a return to sovereign investment-grade rating and President Santos’ push for new fiscal responsibility and mineral royalty laws. The peso has only declined slightly against the dollar and future intervention will be limited, the monetary authority has signaled. The 5 percent GDP growth forecast is intact and unemployment is below 15 percent, although killings and violence have again accompanied end-October local elections. Panama’s debt went to top quality last year and Canal, construction and tourism revenues are all humming to bring expected 7-8 percent output expansion. The treaty must be ratified by the legislature and offshore finance center status, which was formerly marred by money laundering accusations, could see a cleaner route ahead.