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South Korea's Trade, Inflation Figures Signal Resilience to Global Risks
South Korea’s exports gained for the tenth straight month in August and consumer prices rose, signaling the economy’s resilience to global risks may prompt the central bank to boost borrowing costs.
Overseas shipments increased 29.6 percent from a year earlier and the trade surplus will be $32 billion for 2010, up from a previous forecast of $20 billion, the Ministry of Knowledge Economy said in Gwacheon today. The rate of growth in consumer prices was unchanged at 2.6 percent for the third consecutive month, according to a separate report.
Exports fueled 7.2 percent second-quarter economic growth in South Korea even as slowdowns in the U.S., Japan and China dimmed the global growth outlook. The Bank of Korea left its benchmark interest rate unchanged at 2.25 percent in August, while indicating it may add to July’s 0.25 percentage-point increase to damp price pressures stoked by the domestic recovery.
“The central bank now has many reasons to move rates again,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul. “I won’t be surprised to see another 25-basis-point hike next week and this won’t be the end of changes for the year.”
The won climbed the most since June 21 after the inflation and export figures were released, advancing 1.2 percent to 1,184.78 per dollar at 3:27 p.m. in Seoul, according to data compiled by Bloomberg. The benchmark Kospi share index jumped 1.3 percent.
Inflation Risk
Consumer prices may rise above 3 percent in the fourth quarter and reach 3.4 percent in 2011, central bank Governor Kim Choong Soo said last week. July’s rate increase “may not be sufficient” and future moves will depend on domestic and global economic developments, he said. Kim and the policy board next meet to decide on the benchmark rate on Sept. 9.
The monetary authority’s inflation target is 2 percent to 4 percent on average through 2012. The government is increasing power and gas prices over August and September, which may push consumer price growth higher up the target range. The tariff gains will add about 0.1 percentage point to inflation, Finance Ministry Director General Yoon Jong Won said on July 30.
“Price pressures are likely to rise later this year, but inflation has been steady over the last few months,” said Brian Jackson, senior emerging markets strategist at Royal Bank of Canada in Hong Kong. “We continue to expect the BoK to increase policy rates by another 50 basis points by the end of the year, but we think they will likely wait until the fourth quarter rather than delivering another rate hike at their meeting next week.”
Export Competitiveness
The won has declined 1.75 percent this year, one of the weakest performers in Asia, boosting the export competitiveness of companies including Samsung Electronics Co., Asia’s biggest maker of semiconductors, flat screens and mobile phones, and Hyundai Motor Co., South Korea’s largest automaker.
Exports will rise 26 percent to $458 billion in 2010, the economy ministry said, with imports gaining 32 percent to $426 billion. The current-account surplus widened to a 16-month high of $5.88 billion in July, previous data showed.
The “weaker currency can help make up for lower global demand,” Kwon Young Sun, an economist at Nomura Holdings Inc. in Hong Kong, said this week. The benchmark rate will rise another 50 basis points to 2.75 percent by year-end unless the global economy falls into a “double-dip recession,” Kwon said.
Asia-Pacific central banks from Taiwan to Thailand, India and Australia have boosted borrowing costs this year, judging price pressures outweighed global risks including cooling economic growth in major economies and Europe’s sovereign-debt crisis.
Australian, Indian Growth
Australia’s economy grew at the fastest pace in three years last quarter, a report showed today, boosting the nation’s currency on speculation interest-rate increases will resume early next year.
India’s economy expanded at the fastest pace in 2 1/2 years, according to data released yesterday, increasing pressure on its central bank to extend the most aggressive round of monetary- policy tightening in Asia.
Economic growth will accelerate to 5.9 percent this year, more than an April projection of 5.2 percent, and cool to 4.5 percent in 2011, the Bank of Korea has said.
-- With assistance from Michael Munoz in Hong Kong. Editors: Sunil Jagtiani, Cherian Thomas
To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net
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