External factors likely to drive South Korean won, KRW faces downside risks – Nordea Bank

The South Korean economy is expected to benefit from the synchronised rebound in global demand, but the nation finds itself in uneasy times. The South Korean President Park Geun-hye was impeached on 10 March following a series of political and corporate scandals in the past year. On the 9th of May, a presidential election will be taking place.

The election outcome is unlikely to have long-lasting effects on the Korean won, as the leading candidates have similar stance for domestic economic policies. The South Korean won is expected to be driven external factors, mainly by geopolitical development and the USD. However, downside risks are expected to mostly outweigh the upside risks.

South Korea has usually been in favour for a weak currency policy. It is possibly concerned regarding the 6 percent appreciation on real trade-weighted terms since 2016, noted Nordea Bank in a research report. The Bank of Korea is likely to counter any considerable strengthening of the won via verbal intervention.

The South Korean won has performed poorly against its regional peers in the last month as the most recent missile threats from North Korea led to global investors selling off South Korean assets. Even if tensions have alleviated in the last few days because of signs of active involvement from China, foreign capital is unlikely to return for some time.

The prospects for KRW have not been brightened by economic development either. The economic growth continues to be lower than the pre-crisis level. The temporary tailwind in the export sector does not alter the long-term growth challenged from the ageing population and sluggish productivity growth, stated Nordea Bank.

“Our latest EM Traffic Light implied 19 percent probability of extreme pressure on the KRW due to primarily the leverage concern”, added Nordea Bank.