Market participants in the week ahead stand to receive a slew of salient economic updates from South Korea, as the coronavirus crisis has generally battered the country’s growth prospects and rendered its banks vulnerable to asset quality shocks.

A host of significantly adverse conditions have coalesced to pummel the Korean peninsula, including the COVID-19 pandemic, the recent plunge in oil prices, geopolitical uncertainties – namely the health of North Korean leader Kim Jong-un – as well as heightened global financial market volatility and economic distress.

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Marc Chandler, the chief market strategist at Bannockburn Global Forex, noted Tuesday that oil’s “wild ride” has been joined by other developments that are “keeping investors off-balance.”

He said that reports suggesting that North Korea’s Kim Jong-Un may be in critical condition after surgery have spurred concerns about “a potential power vacuum and the command and control” of the North’s weapons.

Meanwhile, South Korea’s containment measures to stave off the fatal COVID-19 respiratory illness has already led to a massive downturn in consumer and business confidence, with major impacts on several of its sectors, including tourism, hospitality, food services, and wholesale and retail trade unlikely to subside in the near-term.

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Indeed, a long list of recent, month-over-month figures from February have been staggering. According to Statistics Korea:

• The nation’s Index of Services fell by 3.5% due to decreases in accommodation and food service activities, as well as in transportation and storage.
• The Retail Sales Index plunged by 6.0% from the previous month and 2.3% from the same year-ago period.
• The Index of all industry production fell by 3.5%.
• The Manufacturing Production Index plunged 4.1% from the previous month, while the Manufacturing Shipment Index decreased 3.3%, and the Manufacturing Inventory Index rose 0.2%.

…while the country’s labor force in March also suffered:

• The economically active population fell 0.8% year-on-year to around 27.8m, while the participation rate fell 0.9% to 62.2%; and
• The economically inactive population totaled close to 17m, a rise of 3.1% over the same year-ago period.

To date, more than 2.5m of COVID-19 cases have been identified in 185 countries and regions, with around 31.5% of that total having hit the U.S. and 0.4% in South Korea, according to the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University. Nearly 172k people have suffered fatalities globally.

As the coronavirus takes a toll on world economies, the International Monetary Fund (IMF) noted in its latest World Economic Outlook (WEO) that it anticipates a sharp, -3% contraction in global growth in 2020 as a result of the pandemic, “much worse” than during the 2008–09 financial crisis. Growth in South Korea is expected to contract -1.2%, while China’s GDP is anticipated to fall to 1.2% from 6.1% in 2019, with Japan likely to decelerate to -5.2% and the U.S. to -5.9%.

Oil Rout Threatens Outbound Shipments

Against this backdrop, the recent oversupply and waning demand for crude oil has compounded South Korea’s woes, fueling rising fears about its export strength.

Shipments out of the country had reportedly fallen nearly 27% year-on-year in the first 20 days of April to US$21.7bn, with petroleum products down around 53.5%.

Overall outbound shipments to some of South Korea’s main trading partners plummeted during the period, including China (-17%), the U.S. (-18%) and Japan (-20%), while critical exports of semiconductors were said to have dipped around 15%, and autos and auto parts by around 28.5% and almost 50.0%, respectively. In the intraday trading session Tuesday, the June 2020 oil futures contract had plunged by around 36% to US$13.08 after hitting as low as US$11.89.

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As China comprises roughly 25% of South Korea’s exports, its economic slowdown is bound to hamper outbound shipments further, while Chinese containment measures will likely stifle cross-border travels, placing a weight on tourism, consumption, and dent household income, which, in turn, will impede the ability of borrowers to repay their loans. 

S&P Global Ratings said it anticipates “events will likely translate into a modest rise in credit costs for Korean banks” and expects industries such as shipbuilding, shipping, and steel to become “particularly pressured, as the sectors continue to face stiff competition amid global overcapacity.”

S&P added that there may also be “some challenges to the manufacturing sectors, including carmakers, which has seen temporary production halts following supply disruptions from certain component makers in China.”

Banks Battle with Credit Quality

Some of South Korea’s largest banks have been struggling to weather the mounting shocks.

Year-to-date in 2020, American depositary receipts (ADRs) of some of the country’s major financial services firms have shed a significant amount of value, including KB Financial Group (NYSE: KB; -40%), Shinhan Financial Group (NYSE: SHG; -43%) and Woori Financial Group (NYSE: WF; -38.75%).

Also, OAS spreads on some of Shinhan Bank’s bonds due in two-three years blew out by 33 basis points intraday Tuesday to an average of 213bps, according to Bloomberg; and year-to-date, credit default swap (CDS) prices have risen on Kookmin Bank (+15bps to 38bps), and Woori Bank (+14bps to 46.5bps) – all signs of credit quality deterioration.

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Moody’s Investors Service in late March also placed four of the country’s regional financial institutions on review for credit rating downgrades: Busan Bank, Daegu Bank, Jeju Bank, and Kyongnam Bank – each rated an investment-grade ‘A2.’

Moody’s said it expects Korea’s economic growth will slow, increasing the risk of a deterioration in the banks’ credit quality “due to the breadth and severity of the shock from the coronavirus outbreak.”

The potential for crumbling asset quality at these banks has increased given their concentrated exposures to the affected regions, namely Daegu and Gyeongbuk, as well as to highly affected small- and medium-sized enterprises (SMEs) in the tourism, services, food and beverage, and retail industries.

Moody’s added that the banks are also exposed to the manufacturing sector, “which is vulnerable to a potential global contraction in trade or disruptions to global supply chains.”

Fiscal and Central Bank Support

To help stabilize the country’s beleaguered household and financial sectors, the South Korean government, as well as the Bank of Korea (BoK), have implemented numerous measures to provide liquidity – similar to the economic support provided by other nations globally.

SMEs, for example, have received various forms of fiscal aid through loans, extensions on the maturities for existing borrowing, as well as reduced interest rates, while hospitals and low-wage earners have seen additional funds pour-in.

For its part, the BoK maintained its Base Rate at a historic low of 0.75% in April after cutting it by 50bps in the previous month.

To help buoy the financial markets, the central bank at the end of March lowered the ratio of collateral for guaranteeing net settlements to 50% from 70% (postponing its previous plan to raise it to 80%) and pushed back its timeline to increase it to 100% by two years – to August 2024.

The bank has also sought to shore-up liquidity by broadening the eligible collateral for guaranteeing net settlements, effectively reducing the amount of collateral financial institutions are required to pledge by KrW10.1tn – from KrW35.5tn to KrW25.4tn.

Further liquidity boosting measures taken by the central bank include widening the range of securities eligible for outright open market operation transactions. Alongside existing government and government-guaranteed bonds, debentures issued by three specialized banks (the Korea Development Bank, the Industrial Bank of Korea, and the Export-Import Bank of Korea), as well as mortgage-backed securities (MBSs) issued by the Korea Housing Finance Corp will be included as eligible securities. However, as uncertainties persist over the extent of economic and financial carnage stemming from the coronavirus pandemic, oil price shock, financial market volatility and related impacts on credit quality – investors will most likely be keeping a close eye on the continued fall out and ability of South Korea’s banks to stay afloat.

On the Economic Calendar:

Mon, Apr 27

• Bank of Korea’s Consumer Survey Index (CSI) (Apr)

Tue, Apr 28

• Bank of Korea’s Business Survey Index (BSI) (Apr)
• Bank of Korea’s Economic Sentiment Index (ESI) (Apr)
• Industrial Production (Mar)
• Retail Sales (Mar)

Thu, Apr 30

• Trade Balance / Imports / Exports (Apr)

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs, and more.