South Korean economy continues to struggle

AFTER performing badly for the first half of 2015, the South Korean economy continues to struggle amid weak external demand for its exports, persistent sluggishness in the Chinese economy, delays in global economic recoveries and adverse impact from the Middle East Respiratory Syndrome (Mers) outbreak.

South Korea's economy continues to be plagued by the persistent economic slowdown in China as these two nations share a close economic interlinkage whereby China is its biggest trading partner accounting for about 25 per cent of its exports. To add to its woes, the recent devaluation of the renminbi has reduced China's spending power, further hurting the demand for its exports. Indeed, its exports to China alone slid 8.8 per cent year-on-year in August.

Its overall exports have continued their trend of decline for the eight consecutive months as they fell 14.7 per cent year-on-year in August. This represents the steepest decline since August 2009 and far exceeded the declines of 3.3 per cent in July and 2.4 per cent in June.

Although South Korea has announced a de facto end to the MERS outbreak, it remains adversely affected by the virus that has dealt considerable damages to its tourism and retail sectors. Domestic consumption and consumers spending decreased significantly as citizens avoid crowded shopping areas and retail stores in fear of contracting the virus. Tourism receipts were also hit hard as the number of foreign tourists decreased 53.5 per cent year-on-year in July.

Against the backdrop of Mers outbreak and a worsening in South Korea's already-weak economic growth prospects, it embarked on both fiscal expansion and monetary easing in an attempt to stimulate its economy and promote growth. In June, Bank of Korea lowered its key interest rate for the second time this year to an all-time low of 1.50 per cent. And in July, the government approved a supplementary budget bill of 11.6 trillion won (S$14 billion).

To take advantage of trading opportunities in South Korea's present economy, investors can purchase non-deliverable forwards (NDFs) on the Korean won against the US dollar. NDFs are essentially outright forward contracts which are settled in US dollars - an element important to the non-convertible property of the Korean won.