South Korea's February 2015 exports dropped 12.2% y/y, as compared with the revised drop of 18.8% in January and decline of 14.3% in December. February's print is much better than consensus expectations of a drop of 16.6%. On a seasonally adjusted month-on-month basis, exports rose 4.7% after declining for two consecutive months.

However, this is not much of positive news as the upside surprised was cloaked by an additional working day. On a per day basis, exports declined 16.6% y/y, as compared with January's decline of 15.2% and December's drop of 14.3%, highlighting weak external demand. The Bank of Korea had recently issued a cautious statement saying that exports are expected to continue falling for sometime due to global economic slowdown.

The upside surprise might by due to a combination of one-off factors. The exports data for February was partly helped by the payback from January's 18.8% decline due to weather-induced disruptions to freight in North Asia and the US. The disruptions from traffic also led to delays in shipments that were to be docked before the Lunar New Year holiday. The backlog of shipments is expected to have been cleared towards February end.

The weak trend is in line with the view that external-oriented sectors' weakness is expected to continue amidst declining manufacturing confidence. This is expected to keep BoK's monetary stance accommodative.

Looking into the details, the weakness from oil-related products improved slightly due to low base effects of 2015 continue to materialise. Indeed, the country's exports of petroleum and steel declined 32.7% y/y and 15% y/y, respectively. On the contrary, there was no rebound seen in vessel shipments, which declined 43.9% y/y. By destination, South Korea's shipments to China declined 12.9% y/y in February, whereas shipments to the EU and US recorded moderate growth of 5% and 4.2%, respectively.

Overall, the underlying trend remains the same that is marked by deeper weakening of external demand and slowing domestic demand. South Korea's growth momentum is expected to slow due to the tough export environment and a sequential payback in private consumption in Q1.

"In our view, this increases the difficulty of the BoK's revised 3% growth forecast being achieved. We maintain our forecasts and expect the BoK to deliver another 25bp rate cut in March, ahead of the National Assembly elections in April.", says Barclays.