South Korean economy likely to grow at 2.7% yoy

South Korea's advance GDP growth for 2Q expanded at a slower pace than in 1Q. Amid sluggish consumption and anemic exports, 2Q GDP growth moderated to 2.2% yoy from 2.5% yoy in 1Q. GDP growth was dragged by weaker private consumption (-0.3% qoq vs +0.6% qoq) caused by the MERS fallout and severe drought. 

The recently introduced fiscal stimulus plan is expected to help offset headwinds from consumption and exports to a certain extent. The number of foreign visitors to Korea has not shown any clear signs of rebound yet. Nevertheless, June IP shows a better print than expected amid fallout from MERS in June. South Korean economy is likely to grow at 2.7% yoy in 2015, but the risk remains to the downside, says Bank of America. 

Hong, Kong, Taiwan and Korea have the highest export linkages to China and, hence, will be most impacted by a weaker CNY. The recent swift and considerable weakening of KRW against USD and JPY reduced the need for easing in the near term. In the medium term, BOK is likely to retain a "weak FX" bias. Having said that, BOK will prefer to avoid a disorderly sell-off that has negative spillovers to domestic economy and asset markets.