The South Korean stock market steadied on Tuesday after
taking a hit of over 3% from news on Monday of the death of Kim Jong-il in the
North, but it still has troubles reflecting its situation, along with
Singapore's, as a leading indicator of economic health, including equity
markets, around the globe.
Even if rational expectations
for a relatively smooth political transition in Pyongyang do not justify great
uncertainty, generalized risk-aversion has not decreased as Asia and the world
await signs of continuing stability in the enigmatic North. Thus the won, the
South Korean currency, fell almost 2% following the announcement of the
succession, leading the central bank's governor Kim Choong-soo to state
publicly that the bank will "closely monitor" developments and
stabilize markets if needed.
The country's finance ministry
expects exports next year to increase only 7.4% over the current year. While
this figure would otherwise be impressive, this year's exports scored a 19.2%
gain over last year's. Exports account for half of the South Korean economy.
South Korea's Purchasing Managers Index (PMI), a measure of economic health, is
now as low as it was after the Fukushima disaster in Japan. Inflation and
consumer debt will restrain private consumption.
South Korea, like Singapore, is
especially export-dependent, and while Korea is more dependent on China than is
Singapore, both are particularly reliant on Europe and North America. These two
countries are thus like canaries in the mineshaft of the international economy.
Not all small East Asian
economies are like this: Indonesia, for example, depends more on intra-Asian
commerce. In contrast to Jakarta's stock market, for example, which starting
from 2008 soared much more than others (a global slowdown affects Asian consumer
demand less than European and North American demand), investors in Singapore
and South Korea still anticipated that increased demand from developed markets
that would raise the profitability of companies there.
The Singapore and Seoul markets
thus responded as "leading indicators" of their national economies.
It is therefore a serious warning sign that in these two countries, not only
stock markets but other standard macroeconomic indexes have lately been cause
for alarm. Thanks to the recently dynamic growth of Asia in general, it is not
projected that these countries fall into recession, but it is expected that
along with the rest of Asia they will experience a deceleration in growth.
Indeed, South Korea is three
times more dependent upon China for exports than upon the eurozone countries,
so decreasing Chinese demand will have particular effects upon Seoul's economy.
(Anticipating a slowdown on the mainland, Shanghai stock market indexes are
down almost one-third in the last twelve months.)
Singapore's greater relative
export dependence on Europe and North America means that its recovery from
2007-08 came faster and more acutely than South Korea's, but also that its
oncoming slowdown will likewise be more acute and the brakes will screech a bit
more. The services sector in Singapore will likely still provide some support,
as will demand from Association of Southeast Asian Nation countries, but
exports in such leading sectors as electronics and biomedical products will
likely decline if not stagnate in months to come.
Anticipating this, investors
have already been withdrawing from the market, as the Straits Times Index lost
18% of its value between early August and early October and, although it has
recovered slightly since then, is still threatening to break out its
post-crisis trading range to the downside.
Singapore's banking sector
looks a bit more resilient than South Korea's, but the country's greater
dependence on tourism is a double-edged sword, as an overall contraction will
reduce foreign exchange from that sector while the high-end tourism that it has
lately been encouraging is unlikely to be as affected. Also, export-dependent
Singapore is still threatened by a slowdown in China, albeit to a lesser extent
than in South Korea.
Both Singapore's and South
Korea's expected growth rate have been revised downward. The consensus
expectation for South Korea by outside observers has fallen over the last two
months from 3.6% to 3.2%, well below the government's official policy target of
3.7% and further below the 6.2% rate experienced this year. Prices of food and
commodities are expected to stabilize in South Korea, containing inflation, but
poor employment prospects will limit any gains in consumer buying power.
A new survey released last week
by the Monetary Authority of Singapore guessed that gross domestic product
(GDP) in the city-state may grow only 3% in 2012 after rising an estimated 5.2%
this year. The new consensus estimate is down from a 4.9% figure three months
ago. Government figures for the two countries are slightly higher in both cases
but have yet to go through their latest revision cycle.
Emerging economies throughout
Asia will suffer along with the region's leaders. A recent International
Monetary Fund report on the Philippines, for example, has reduced the estimate
of growth there for 2012 from 4.9% to 4.2%, even while its own estimate of GDP
growth for the current year was revised downward from an earlier forecast 4.7%
to 3.7%. Singapore and South Korea are the places to watch for indications of
any recovery.
Dr Robert M Cutler
Asia Times
Dr Robert M Cutler
(http://www.robertcutler.org), educated at the Massachusetts Institute of
Technology and The University of Michigan, has researched and taught at
universities in the United States, Canada, France, Switzerland, and Russia. Now
senior research fellow in the Institute of European, Russian and Eurasian
Studies, Carleton University, Canada, he also consults privately in a variety
of fields.
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