- Among Asian countries, South Korea is a prime potential victim of the current global credit crunch. Debt leverage among domestic households and companies has soared, domestic commercial banks are dependent on short-term wholesale and foreign funding and the current account has deteriorated on the back of higher crude oil prices. Hence, we expect the South Korean economy and KRW to underperform in the current global financial deleveraging environment.
- However, South Korea’s external liquidity position is today much stronger, with FX reserves by far exceeding short-term debt. In addition, South Korea has avoided many of the problems usually associated with a decline in private savings and higher debt leverage, mostly because fiscal policy has been tight. South Korea still enjoys a favourable competitive position and its current account deficit is modest and likely to shift back into surplus in 2009.
- We do not expect a repeat of 1997 given South Korea’s strong external liquidity position and a much healthier current account. South Korea is unlikely to default on its foreign currency debt. While KRW is no doubt undervalued at current levels, it is difficult to see a significant turn around in KRW as long as financial deleveraging is driving the market. However, some kind of normality will eventually return to financial markets, and with current account flows again turning supportive we expect KRW to r ebound significantly on a 12M horizon.
