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The withdrawal of the United States from the Trans-Pacific Partnership (TPP) agreement has increased risks to global trade, rattling markets. This is of particular concern for South Korea’s economy, which is heavily dependent on trade.
There is also a higher probability that the United States authorities might label South Korea, along with other economies in the region including China and Taiwan, a currency manipulator. Recall that in October 2016, South Korea met two of the three criteria to be labelled a currency manipulator (an economy having a significant bilateral trade surplus with the US and a material current account surplus) set out by the US treasury to determine if currency practices are unfair. China matched one. The third criterion is engaging in persistent, one-sided intervention in the FX market.
But S. Korean finance minister Yoo Il-ho is confident that the country is unlikely to be named a currency manipulator on current criteria. However, he has conceded that there are concerns that in an attempt to target China, the US authorities could include South Korea too. This would be another setback for the South Korean economy. As we have been pointing out, exports have only recently started showing signs of recovery.
The preliminary customs data (published on Monday) showed exports increasing by 25.0 percent y/y in the first 20 days of January compared to 11.6 percent y/y in the first 20 days of December. And imports were up 25.9 percent y/y in the first 20 days of January compared to 9.4 percent y/y in the first 20 days of December. As we have been pointing out, the economy continues to face headwinds to growth, in part due to increased political uncertainty in the aftermath of President Park’s impeachment last month.
Moreover, instability in the financial markets is likely to delay the recovery and result in bigger side-effects from high household debt and the Bank of Korea (BoK) Governor Lee Ju-yeol also echoed this earlier this month, saying that economic growth is expected to stay low for a considerable time. The governor added that financial market volatility is expected to increase this year and also promised that the central bank would cooperate with the government and financial regulators to maintain financial stability.
