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South Korea Business Forecast Report Q3 2014

  • June 2014
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

The South Korean leadership's increasing rhetoric on the benefits of eventual reunification with the North does not alter our view that such an eventuality is highly unlikely. While a collapse in the North Korean regime remains the most likely scenario under which reunification would come about, the status quo is likely to remain in place for the
foreseeable future. South Korea's relatively strong Q114 real GDP growth print has prompted us to upgrade our 2014 growth forecast to 3.5%, from 3.0% previously. Korean exporters will continue to ride on the economic recovery in the developed markets for now while a recovery in real estate sector may support construction investment. That
said, downside pressure is still likely to stem from China's slowing economy, elevated household debt levels, as well as risks of a continued contraction in business investment.

South Korea's government debt rises sharply when public sector enterprise debt is included on its balance sheet. However, even at 64.5% of GDP, we do not see this as a concern given our forecasts for primary fiscal surpluses and attempts by the government to reign in state-owned enterprise (SOE ) debt. We continue to see the Bank of Korea (BoK) holding its benchmark seven-day repo rate at the current level of 2.50% for the remainder of 2014, before hiking by 50 basis points in 2015. Consumer price inflation looks to have hit a trough, and should rise slightly over the coming months, but will remain well below the BoK's 2.5-3.5% target as the high level of household debt will cap consumer demand. The Korean won has been on a tear since breaking through resistance at KRW1,050/USD, and the trend remains bullish for the currency. However, we are seeing bearish divergence on the relative strength index which warns of a short-term reversal. As such we are neutral in the short term, with KRW1,050/USD likely to act as strong support and KRW1,000/USD as firm resistance. Against other developed market currencies, however, we are much more bullish, especially the euro.


Major Forecast Changes

This increased demand for credit should feed through into higher money supply growth rates in H214, and put upside pressure on CPI. As such, we are revising our end-2014 CPI to 2.0% from 1.8% previously. That said, the high level of household debt will continue to act as a drag on consumer demand, keeping inflation pressures in check.

Table Of Contents

South Korea Business Forecast Report Q3 2014
Executive Summary. 5
Core Views..5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook. 7
SWOT Analysis.. 7
BMI Political Risk Ratings 7
Domestic Politics . 8
Reunification Talk Falling On Deaf Ears..8
The South Korean leadership's increasing rhetoric on the benefits of eventual reunification with the North does not alter our view
that such an eventuality is highly unlikely. While a collapse in the North Korean regime remains the most likely scenario under which
reunification would come about, the status quo is likely to remain in place for the foreseeable future .
table: Political Overview..8
Long-Term Political Outlook.. 10
Constitutional Reform To Improve Governance?.10
South Korea is likely to see a renewed push for constitutional change in order to address imbalances in the political system that lead to
periodic instability. In addition, owing to the single-term restriction on the presidency, most presidents typically become 'lame ducks' well
before departing office, leaving the country in a state of drift.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings... 13
Economic Activity... 14
Investment Rebound, Trade Resilience To Support Growth Outlook..14
South Korea's relatively strong Q114 real GDP growth print has prompted us to upgrade our 2014 growth forecast to 3.5% from 3.0
%previously. Korean exporters will continue to ride on the economic recovery in the developed markets for now while a recovery in real
estate sector may support construction investment. That said, downside pressure is still likely to stem from China's slowing economy,
elevated household debt levels, as well as risks of a continued contraction in business investment.
table: Economic Activity..14
Fiscal Policy. 15
Government Debt Under Control Despite Surge15
South Korea's government debt rises sharply when public sector enterprise debt is included on its balance sheet. However, even at
64.5% of GDP, we do not see this as a concern given our forecasts for primary fiscal surpluses and attempts by the government to reign
in state-owned enterprise debt.
Table: Fiscal Policy15
Monetary Policy .. 16
Credit Uptick To Prove Short Lived16
We continue to see the Bank of Korea (BoK) holding its benchmark seven-day repo rate at the current level of 2.50% for the remainder
of 2014, before hiking by 50 basis points in 2015. Consumer price inflation looks to have hit a trough, and should rise slightly over
the coming months, but will remain well below the BoK's 2.5-3.5% target as the high level of household debt will cap consumer
demand.
table: Monetary Policy ...17
FX Forecast . 18
KRW: Recent Gains Raise Downside Risks..18
The Korean won has been on a tear since breaking through resistance at KRW1,050/USD, and the trend remains bullish for the
currency. However, we are seeing bearish divergence on the relative strength index which warns of a short-term reversal. As such we
are neutral in the short term, with KRW1,050/USD likely to act as strong support and KRW1,000/USD as firm resistance. Against other
developed market currencies, however, we are much more bullish, especially the euro.
Chapter 3: 10-Year Forecast... 21
The South Korean Economy To 2023. 21
Robust Growth To 2023...21
We are expecting annual real GDP growth in South Korea to decelerate marginally from an average of 4.4% between 2001 and 2008 to
around 4.3% over 2014-2023. While we see many of South Korea's traditional exports meeting fierce competition in the coming years
from emerging Asia, we believe that underlying conditions within the country are conducive to a move up the production value chain,
ensuring a robust economic growth profile. Furthermore, we see private consumption being a key contributor to growth over this forecast
period.
table: Long-Term Macroeconomic Forecasts21
Chapter 4: Business Environment. 25
SWOT Analysis 25
BMI Business Environment Risk Ratings.. 25
Business Environment Outlook. 26
Institutions... 26
Table: BMI Business And Operation Risk Ratings26
Table: BMI Legal Framework Rating.27
Tab le: Lab our Forc e Qua lit y..28
Infrastructure... 29
TABLE: ASIA - ANNUAL FDI INFLOWS29
Table: Trade And Investment Ratings.30
Market Orientation... 31
Tab le: Top Export Destinati ons (USDmn)32
Operational Risk.. 34
Chapter 5: Key Sectors.. 35
Defence 35
tab le: South Korea Defenc e Expenditur e, 2012-2018..36
Pharmaceuticals and Healthcare... 39
tab le: Phar mac eutica l Sales, Hist orica l Data And Forecasts 41
TABLE : Healthcar e Expenditur e Trends , Hist orica l Data And Forecasts 42
Other Key Sectors... 43
table: Oil and Gas Sector Key Indicators..43
table: Telecoms Sector Key Indicators43
table: Infrastructure Sector Key Indicators...43
table: Food and Drink Sector Key Indicators..44
table: Autos Sector Key Indicators...44
tab le: Freight Key Indicat ors 44
Chapter 6: BMI Global Assumptions. 45
Global Outlook. 45
Emerging Market Deceleration45
Table: Global Assumptions.45
Tab le: Developed Stat es, Real GDP Growt H, %...46
Tab le: BMI VE RSUS BLOOM BERG CONSENSUS REAL GDP GROWTH FORECASTS, %. 46
Tab le: Emerging Mark ets , Real GDP Growth , %..47

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