South Korea and its currency have come under pressure. The won has lost over 4% against the dollar in the last week, fueled by concerns both domestic and abroad.
Global concerns
The widely unpredicted success of Donald Trump’s bid for the U.S. presidency elicited a much predicted outcome: widespread losses for emerging markets, particularly in Asia. Trump has been a vocal critic of the Trans-Pacific Partnership deal that would open trade barriers with countries in the Pacific Rim and it remains uncertain whether this opposition will translate into action once he becomes president. Khoon Goh, ANZ head of Asia research and former economic advisor at the Reserve Bank of New Zealand, told Bloomberg that their expectations are for continued currency weakness in the Korean won and other countries more exposed to trade. South Korea’s finance minister has confirmed that the government is willing to take action to stabilize financial markets in the wake of rising volatility following Trump’s win.
Domestic pains
Ongoing concerns over inflation and growth targets prompted the Bank of Korea to cut interest rates to record-lows for the first time since January 2015, earlier than investors predicted. The bank’s proactive cut indicates their willingness to take action should their concerns endure.
On the political front, the media is buzzing about the scandal between President Park Geun-hye’s contentious friendship with civilian Choi Soon-sil. Allegations that President Park’s relationship with Choi influenced government decisions has roiled the public against her. In the latest Gallup poll, the president’s approval ratings are at 5% – the lowest print since the poll’s inception.
Prosecutors have announced that they will be conducting a formal inquiry with the president. Although this is not the first time South Korea’s leadership has been under scrutiny for corruption, this will be the first ever direct questioning of a sitting president in pursuit of a criminal investigation.
Samsung was swept up in the investigation over payments they made to a company owned by Choi and her daughter, prompting prosecutors to raid their offices in Seoul last week. The timing of the raid is inopportune for the electronics giant as they are still stemming the fallout from an internal crisis. Samsung’s stock price tumbled two months ago when headlines exploded about their newest smartphone – exploding. The Galaxy Note 7 started spontaneously catching fire shortly after it was released. Fast forward to an expansive recall that Samsung has said could reach two million dollars and will almost certainly eat into margins and continue to plague the company for some time. Although this is just one enterprise, Samsung’s revenues account for 17% of South Korea’s total GDP making it a significant player in the overall trajectory of growth and the economy.
Challenges to other major Korean enterprises increase cause for concern on the domestic front. The country’s fifth largest conglomerate Lotte Group’s leadership were indicted for embezzlement, and South Korea’s largest container carrier Hanjin Shipping filed for bankruptcy in August.
Waves of political protest echo the anti-establishment sentiment across the globe that has upended the norms in both Britain with a Brexit vote, and in the U.S. with Donald Trump as president elect. Additional downside surprises could accelerate pressure on USD/KRW.
Natalie Ciavarella, Corporate Dealer at World First USA, Inc.
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