South Korea has diverged from some Asian emerging countries with a possibility of financial turmoil, in terms of various indicators.
India, Indonesia and some countries seen as having met a financial crisis in the previous month showed a dramatic deterioration in indicators, whereas Korea’s did not show much change.
Korea appears to have decoupled from other Asian countries, as it is moving in a different direction, unlike in the past.
According to Bloomberg this week, Indonesia’s premium on government credit default swap (CDS) jumped 91.99 basis points from 194.44 basis points to reach 286.43 basis points last month.
However, Korea only showed an increase of 2.66 basis points from 82.50 basis points, reaching 85.16 basis points.
A rise in premium on CDS can be interpreted as an increased risk of bankruptcy for the companies and countries that issued the products.
Both Korea’s and Indonesia’s premium on CDS soared at the end of June with the possibility of the United States’ reduced quantitative easing. However, Korea went in a different direction at the end of last month.
The State Bank of India (SBI)’s premium on CDS showed similar fluctuations with Korea’s. However, it jumped 116.52 basis points from 255.57 basis points, to reach 372.08 basis points in the previous month.
SBI’s premium on CDS is a key indicator in the financial market and measures the risk of India’s national bankruptcy.
The decoupling of Korea and other emerging countries, including India and Indonesia, was supported in terms of foreign exchange rates.
The Indian rupee and Indonesian rupiah fell 7.14 percent and 7.75 percent against the U.S. dollar last month, respectively, but the Korean won dropped slightly, by 0.38 percent.
According to Hyundai Securities and Bloomberg, foreigners purchased Korean stocks worth USD 171 million (KRW 190 billion) last week.
However, foreigners sold Indian stocks worth USD 437 million, Indonesian stocks worth USD 513 million and Thai stocks worth USD 766 million, showing a sharp contrast to the Korean market.
Major investors on Wall Street also sold off their assets in emerging countries in the last six months, while purchasing Korean bonds worth USD 11.5 billion, according to Bloomberg.
It also noted that PIMCO, Manulife Asset Management’s Asia funds and the Schroder Investment Management are focusing on Korean assets.
The decoupling of Korea from other emerging markets is based on the market perception that Korea is differentiated from other countries in terms of its economic fundamentals.
HSBC, Credit Suisse, ING and other global financial institutions forecast that Korea and other countries with an increasing current surplus are attractive investment destinations.
Tim Condon, Managing Director and Head of Research for Asia with ING, told CNBC that boundaries between those with increasing account surplus and others with increasing deficits are becoming clearer, adding that India and Indonesia are not preferable investment destinations, but Korea and Taiwan are.
Thomas Byrne, Senior Vice President and Head of Asia Pacific Sovereign Risk at Moody’s, visited Korea to evaluate its credit ratings and noted that Korea is decoupled from other Asian countries.
Gong Won-bae, a researcher at Hyundai Securities, noted that Korea’s economic fundamentals are strong against other emerging countries, and that a weak won can also act as an advantage for export-oriented companies, adding that relative attractiveness is high among emerging countries.
He added that reduced quantitative easing will have a limited impact on the Korean market.
Source Text
Source: Yonhap News (Aug. 26, 2013)
** This article was translated from the Korean.