Korea’s Brooding Ballistic Responses
Korean stocks continued to struggle despite good first quarter 3.5 percent GDP growth as relentless won appreciation to the 1000 per dollar line raised export fears alongside the geopolitical ones with the North threatening further missile launches and dismantling border joint ventures. Japanese ties were also frayed as the yen’s double-digit plunge under Abenomics was aggravated by his military honors at a World War II shrine amid a sharp bilateral tourism drop. President Park began a US visit to re-affirm security and trade alliances and maintain foreign capital inflows on slipping conglomerate earnings following Woongjin’s bankruptcy just as she entered office. Electronics could accompany construction and shipbuilding into the doldrums as the president unveiled $15 billion in budget stimulus before her trip raising public debt above 35 percent of GDP. It targets job creation and subsidies but spurns additional housing breaks with family debt already at 150 percent of income. With this load the central bank will stay cautious on reducing rates even as Tokyo’s record easing solidifies the zero bound there. A handful of Seoul analysts argue that retail and institutional money could shift into won assets to bridge the currency differential but trust and life insurer data have yet to show allocations. Through the end-March fiscal year insurers’ 45 percent weighting in JGBs was unchanged and they demand hedging facilities for any move abroad. For individual participants in the toshin and Uridashi segments other Asian markets are more popular and diversification to Europe and Latin America is also a prevailing trend. They are also wary of regular Korean intervention and taxes and inflow restrictions which complicate returns alongside the historically tense relationship.
The rivalry extends to Indochina where both countries have deployed stock exchange and development agencies for financial sector technical assistance. Vietnam is the only MSCI frontier index member with solid gains this year as credit growth is in single digits with state banking cleanup receiving attention at minimum 10-15 percent NPL levels. GDP growth should again be 5 percent on inflation around 7 percent allowing for further benchmark interest rate cuts. With foreign exchange reserves replenished to $25 billion dollar and gold flight has abated and annual commercial external debt repayment is only $150 million. Aid, remittances and FDI continue to offset the trade deficit, and the Vinashin default and recent sovereign downgrade have faded from memory as investors await fresh issuance. In Myanmar securities market launch is part of broader reforms including monetary authority independence and private commercial bank opening. The central bank will use Treasury bills to manage liquidity and end budget deficit financing. China and Hong Kong have been the major backers of oil and gas projects with the military-run state monopoly but the lifting of sanctions and a new investment regime will spread the takeoff base.
