By Carl Delfeld of Chartwell ETF and Chartwell Partners Asset Management
The South Korean ETF (EWY) has been a good performer lately but could run into significant turbulence. The Korean central bank recently unexpectedly increased its benchmark interest rate for the first time in a year, bumping it up by a quarter-point on Thursday to 5.25%, an eight-year high.
While the new government is pushing ahead with the privatization of state-invested companies such as Daewoo Shipbuilding and Marine Engineering, South Korean inflation is at its highest level in almost a decade and Korea will likely record its first current account deficit in 11 years. Unlike 1997, however, the country has ample foreign exchange reserves – seven times pre-crisis levels.
The Bank of Korea spent $10bn in July supporting the won, just as it was after the Asian financial crisis broke in 1997. Consumption and employment are falling with vibrant exports a bright spot in a mixed picture.
The Financial Times reports that external debt, exceeded $400bn at the end of the first quarter which is more than double 1997 and represents a far higher as a percentage of national output. Household debt, at 80% of GDP, is higher than it has ever been and HSBC calculates that corporate and household debt are more than 300% of GDP, or half as much again as pre-crisis levels.
Last week’s rate rise, the first in a year, means servicing these debts is getting harder. Korean banks may be a bit vulnerable. Moody’s Investors Services estimates foreign currency accounts for 12 per cent of system funding.
Korea’s productivity is 60% below the US level. Service sector productivity is only half that of manufacturing, and has been stagnant for almost 15 years.
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