…and we have our first victim under the category “to export your problems or not, that’s the question” : South Korea.
When “Abenomics” was announced for the first time late November, markets already anticipated on a huge Japanese support program in budgetary terms and in monetary terms to create inflation and weaken the currency. And so far, they have indeed realized a considerable currency debasement against all the major currencies, even 19% against the single currency:
Now for some, Japan is may be not as such an issue and enabling us to afford the attitude of benign neglect when it comes to the economic impact. For others such as South Korea however, the impact is considerable. Some numbers first on the economy : 50% of GDP is yearly exported – 7th in world export ranking – and here Japan is the third most important export market after China and the US. Also on the import side of the equation, a number of roughly 50% of GDP applies with Japan being the second most important supplier after China. Hence a 15 to 20% exchange rate correction in one’s disadvantage towards a major trade partner has some considerable impact on the trade balance evolution and competitiveness.
Yesterday, the government took notice from the industrial complaints and took action, this after the Bank of Korea refused to play along with the government and slash interest rates (currently status quo at 2,75%). It unveiled a 17,3 trillion KRW supplementary stimulus budget ($15,4 bio or 1,3% of GDP) which will have a net incremental effect of 5,3 trillion KRW after covering for expected revenue shortfalls. And another 2 trillion KRW is already in the pipeline. Objective : job creation, housing market and stimuli for small and medium sized companies and export oriented companies.
On growth, South Korea has had a rough time when compared to other Asian economies, posting less than 1% quarterly growth for seven consecutive quarters. Last year, growth was less than 2%. And for this year, initially the growth outlook was set at about 3% but recently lowered to 2,3%. And thus comes this budget which will most likely push the number towards 2,6%.
Impact on public finnace: national debt will increase from 34,8% of GDP to 36,2% with a budget deficit still below 3% of GDP. So they can afford it but that is not the main line here. With China losing some steam and Japan rigging the game with major bazookas, other victims will soon follow. Certainly in view of what has happened to certain commodity prices over the past couple of days. And when you put these pieces together, my guess is that next in line will be Australia : commodity sensitive and main trade partners being China (29% exports, 18% imports), Japan (20% exports, 8,5% imports). And so markets already anticipate rate cuts from the RBA, shifting the hot potato to some else.