S. Korea’s economy remains intact despite external downside risks: Moody’s

2019.05.22 09:30:51

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Moody’s Investors Service on Tuesday reiterated that the export-reliant South Korean economy would take a hit from the slowing growth in Chinese economy, intensifying U.S.-China trade war, and potential auto tariffs by the United States but ensured the country’s economic fundamentals remain intact.

In a media briefing on Tuesday, Christian de Guzman, Moody’s vice president and senior credit officer, said that Korea’s economy that depends highly on exports is facing with a great challenge of softening demand for Korean products abroad.

In particular, the slowdown in China’s economic growth poses a big threat to Asia’s fourth biggest economy because the neighboring country is Korea’s biggest trading partner. de Guzman explained that China imports not only intermediary goods but also final goods that can be consumed in the country, which means that if demand shrinks in China, so will China’s imports.

Korea would be also hit by the escalating trade tensions between its two biggest trading partners the U.S. and China and the U.S.’s potential tariffs on imported cars, the analyst said. Korea, Japan, Germany, Mexico, and Canada are most vulnerable to heavy duties on car imports to the U.S., but Korea will most likely be exempted from the auto tariffs, he expected.

Reflecting such downside risks, Moody’s Investors Service in March cut its growth outlook on Korea’s economy to 2.1 percent this year and 2.2 percent in 2020 – lower than its respective estimates of 2.3 percent and 2.5 percent in November last year.

de Guzman, however, expected Korea’s economy would regain momentum later this year because the government’s proposed fiscal policy could be a positive factor to overall growth, and an anticipated turnaround in technology companies’ earnings in the second half of this year could lead to a rise in demand for Korean semiconductors, the country’s mainstay export item.

“We still think that Korea’s strong economic fundamentals remain intact,” he said. “Current negative economic trends are largely cyclical in nature.”

In Moody’s view, “Korea’s medium-term growth performance still exceeds that of other countries with similar ratings” despite the country’s demographic issues including the rapidly aging population and labor market issues.

Korea is also expected absorb external shocks, thanks to its diverse economy, structural account surpluses, a net external creditor position and a favorable debt structure.

When it comes to Korea’s monetary policy, de Guzman expected the Korean government would remain accommodative as inflation remains low and it has not reached near the target inflation rate.

By Chung Seok-hwan and Lee Eun-joo

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