INTERVIEW Korea's robust exports to reduce recession fears: S&P, Fitch

Louis Kuijs, APAC chief economist at S&P Global Ratings / Courtesy of S&P Global Ratings

By Lee Kyung-min

• Published Aug 21, 2024 4:22 PM KST
• Updated Aug 22, 2024 2:47 PM KST

The aftereffects of Korea’s weak private consumption brought on and exacerbated by sustained elevated borrowing costs will have a contained impact on the country’s growth, eclipsed by prospects of strong IT exports in the year to come, senior economists of two of the top three global ratings agency said, Wednesday.

The growth profile of the export-dependent economy is stifled in part by 18 months of monetary tightening by the Bank of Korea (BOK), in their view. However, the country’s current rate is not significantly high compared to the U.S., for example.

Korea's current rate is still higher than the “optimal” level as measured by the neutral rate, widely known as the r-star. This in turn bolsters the view that the BOK would be able to better navigate a recession. The central bank could have additional room for easing by as much as the difference between the neutral rate and the rate at the beginning of an easing cycle.

The r-star is a theoretical rate that neither overstimulates nor slows down the economy, enabling it to achieve potential growth. This is a state of equilibrium desired by monetary authorities. Central bankers around the globe estimate the rate to determine the adequacy of a country's monetary policy.

“The risk of recession is modest at the moment, although we can never rule it out," Louis Kuijs, APAC chief economist at S&P Global Ratings, said in an interview with The Korea Times.

The chief economist is of the view that Korea will continue to benefit from a relatively good export performance in the coming 12 months.

According to the Korea Customs Service, Korea has registered 14 consecutive months of trade surplus since June last year. The streak is expected to continue, as indicated by the country’s exports between Aug. 1 and 20 reaching $33.1 billion (44.1 trillion won), up 18.5 percent from the previous year.

Most pronounced was the 42.5 percent year-on-year increase in semiconductor exports to $6.7 billion.

The semiconductor constituted over a fifth, or 20.3 percent of the total exports, up 3.4 percentage points over the same period. Exports of computer parts and ships increased over 98 percent and 79 percent, respectively.

The optimism is echoed by Alex Muscatelli, a sovereign credit analyst and director of the Economics Group of Fitch Ratings.

“It is true that net trade has been a driver of growth in Korean GDP over 2023 and the first quarter of 2024,” he said in an interview with The Korea Times.

Imports increased at a strong pace in the second quarter, while real GDP declined slightly.

However, weak real income growth and still-high interest rates will constrain consumer dynamics for the remainder of the year, in his view.

Net trade will outstrip domestic demand as a driver of growth, advancing the forecast that real GDP growth for the whole year will be 2.6 percent.

“At the same time, the downside risk to our forecast remains, as indicated by a potential outturn for GDP in the second quarter.”

Export-import dynamics will underpin improvements in the current account surplus this year to 2.7 percent of GDP, up from 1.9 percent in 2023, he added.

BOK easing

Kuijs of S&P acknowledged that the BOK’s key rate weighs on growth. But equally noteworthy was Korea’s level remaining far lower than the U.S.'

“The housing market, one of the most interest rate-sensitive sectors of the economy, is recovering. If Korea were to fall into a recession, the BOK should be able to respond and ease policy. We see GDP rising 2.6 percent this year and 2.4 percent in 2025.”

He said the BOK easing of a quarter point (25 basis points) will come this year, and the rates will inch down by 75 basis points next year.

Muscatelli of Fitch shares this view.

“With inflation still above target, we expect the BOK to cut rates only once this year, by 25 basis points to 3.25 percent,” he said.

“Weaker price pressures will propel faster cuts next year to 2.5 percent, as enabled by the combination of stronger real incomes and easier financial conditions allowing domestic demand to recover.”

The S&P APAC chief economist said Korea’s household debt as a share of GDP is high in international comparison.

“Corporate debt is also elevated, on this metric," Kuijs said. "We have seen policymakers trying to contain household debt in recent years. Private debt fell in 2023, as a share of GDP. Continuing containing private debt would strengthen macroeconomic stability and help build buffers.”