South Korea’s trading trends

Korea is seen as a bellwether for global trade because it exports a large array of goods that make their way into a variety of products, including machines, displays and refined oil.  

South Korea’s trade data, both exports and imports, have been falling for the last few months. Industrial production print has also come in weaker than expected for ten consecutive months. In both closely watched data points can largely be attributed to China (to whom South Korea exports a lot of capital goods). China has struggled to rebound from the impact of its Covid lockdowns. Global activity has also been hampered by global central banks maintaining a restrictive policy to rein in high inflation over the last year.  

Central banks are expected to maintain higher rates to continue their fight against inflation for some time, putting pressure on demand. The Bank of Korea has held policy steady in recent months while keeping the door open to potential further tightening after raising its benchmark rate by 300 basis points since 2021. 

Korea’s exports are driven largely by the country’s ability to export technology products, an area where competition in general is growing. Before the pandemic, Korea (Samsung) and Taiwan (TSMC) were the top manufacturing hubs for the semiconductor industry. The pandemic induced an unprecedented boom in the semiconductor industry, which led to built-up inventories over 2021 and 2022. The growth experienced in those periods was never expected to be sustainable and so growth in Korea’s semiconductor inventories this year, has been slower due to the drop in global demand for chips. 

The weakness in data has been pronounced enough for the regulators to step in. The country’s finance ministry announced this month that it will allocate up to 181 trillion won (equivalent to $137 billion) in low-interest loans for exporters through the end of the current year. Additionally, the ministry will eliminate visa application fees for tourists from China in an effort to boost both exports and tourism. South Korea also formally restored trade ties with Japan and signed a free trade agreement with the Philippines to further enhance trade relations with the two nations.  

On the domestic front, the real estate sector’s downturn seems to have stabilised to some extent.  

Home prices have also stabilised after falling 17% from their peak. Mortgage rates have also come down from their peak, although they remain elevated by historical standards. Household credit demand is still weak, and deleveraging continues. Property-related payment defaults have also been on the rise this year. Inflation fell to 2.7% in June on the back of the high base of energy prices last year. Lower inflation and somewhat better economic conditions in the first half of this year have led to an uptick in consumer sentiment. 

We remain cautious on the outlook for the remainder of this year. With tech companies experiencing a turnaround in demand and earnings last quarter, the elevated level of semiconductor inventory does not offer much assurance about near-term production. Tighter liquidity conditions (when compared to last year) and household deleveraging will continue to weigh on domestic demand. We expect the Korean central bank, the Bank of Korea, to wait until the Fed finishes hiking to start its easing cycle. 

Prerna Bhalla, Investment Analyst

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