South Korea - Asia's canaries coughing

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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