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Physical Indicators and Financial Indices Improve

While the Korean economy’s perceived growth rate remains low under a polarized economic structure, various physical indicators and financial indices are improving.

Although it is a little early to be confident of a full-scale economic recovery, the recent trend is heightening expectations. Some private economic research institutes are considering upwardly adjusting their economic growth rate forecast.

According to financial institutions and ministries on Sunday, the Korean financial market is leveling off as the won and the stock market are rising and the Fed’s announcement of its decision on tapering is looming.

The KOSPI bounced back to the 2,000 point level for the first time in three months last Wednesday and the won-dollar exchange rate fluctuated slightly after falling to KRW 1,084.1 per dollar last Tuesday and hitting a three month-low.

This is mainly attributable to the inflow of foreign capital, which holds a positive outlook on the Korean economy despite concerns for the Fed’s taper.

The credit default swap (CDS) premium on Korea's foreign currency bonds with five-year maturities traded in the New York market dropped from 117 basis points (1 bp = 0.01 percentage points) on June 24 to 72 basis points on September 12. The added interest rate for a foreign exchange stabilization bond maturing in April of 2019 also fell from 160 basis points to 105 basis points.

Physical indicators are also showing gradual improvement.

In particular, Korea’s exports rose by 7.7 percent YoY to reach USD 46.37 billion (customs basis) in August, representing a steady increase in export growth rate from 1.0 percent in June and 2.6 percent in July.

The figures support the outlook that current account surplus, which continued for 18 months straight up to July, will increase even further.

In this regard, the Hyundai Economic Research Institute (HERI) is considering upwardly adjusting its growth rate forecast for this year (2.6 percent) released last June.

Lim Hee-jung, a researcher at HERI, noted that improvements of various indicators also back expectations for economic recovery.

Last month, the Korea Institute of Finance moved this year’s growth rate forecast up from 2.6 percent to 2.8 percent.

However, private consumption is still weak and investment is slow.

In terms of Gross Domestic Product (GDP), private consumption growth in the second quarter reversed to an increase from the first quarter’s -0.4 percent, but the QoQ growth rate remained at a 0 percent range of 0.8 percent. In addition, facility investment in the second quarter dropped by 0.2 percent.

The Bank of Korea’s Consumer Sentiment Index (CSI) for August remained the same for three months at 105. A CSI exceeding 100 means that households with a positive view on the economy outnumber households with a negative view, and a CSI of less than 100 means the opposite.

Lim noted that negative factors such as massive household debt and a polarized economic structure including the polarization between large exporting corporations and small and medium-sized companies are restricting the improvement of private consumption, and added that unfounded jitters about the economy are also holding back recovery.

Source Text

Source: Yonhap News (Sep. 15, 2013)

** This article was translated from the Korean.

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