Korea’s Breakthrough Trade Trudges
Korean shares retrieved momentum from activation of the free trade agreement with the US, despite a monthly current account deficit on softer exports and confusion over an apparent nuclear testing moratorium for food aid deal with the North’s new leader. Representatives from Washington and Pyongyang meeting in Beijing struck the arrangement following a period of saber-rattling across the demilitarized zone as the respective sides girded for transition. For upcoming elections, candidates have urged Seoul to take a wait-and-see approach as joint-venture operators seek to revive light manufacturing and tourism projects. The powerful chaebol conglomerates after failed attempts in the past remain reluctant to re-engage especially as they come under criticism at home for poor governance and unfair competition with small business. They have withdrawn from the baked goods business dominated by shopkeepers after lawmakers expressed outrage, and top executives are under indictment for alleged embezzlement and insider transactions which contribute to “discount” single digit p/e valuations on the exchange. GDP growth, aided by front-loaded fiscal priming, is at 3.5 percent and the central bank has been on hold as higher oil prices again threaten the inflation target. Regulators slowed the pace of household credit expansion to 5 percent in the last quarter as banks have tightened standards and consumption may suffer from the hangover. European lenders continue to cut their claims on overall external debt of $400 billion, with companies on track for a record $30 billion in bond issuance this year to rollover maturities. State-owned utilities are raising money for overseas acquisitions, and foreign investors have jumped into local government paper for a 7 percent share despite the re-imposition of withholding tax. They get yield pick-up and follow new central bank debt buyers including China and Switzerland.
The Chinese relationship is part of burgeoning bilateral securities ties which recently featured allotment of a mainland QFII quota for the $300 billion National Pension Fund in line with its regional equity diversification strategy. The won has fluctuated frequently with such capital movements and global risk appetite, and the authorities have intervened regularly although their hand is less visible than in the 2008-09 squeeze. Korean instruments may soon appear in the quarterly trading favorite tally of industry group EMTA, following Hong Kong’s sudden popularity as a yuan proxy vehicle. According to its 2011 annual report volume was off 5 percent to $6.5 trillion with two-thirds dedicated to local activity. Of the total, corporate and Eurobond segments are almost equal, with Latin America and Europe the top regions. In Asia, Indonesia has been a large exposure but with the central bank now holding 12 percent the amount outstanding the trigger is on a short fuse.
