South Korea’s Collapsing Merchandise Trade

I’m supposed to be on a vacation, but there have simply been too many very interesting developments some of which I feel I must share.

Well one of these has been that Korean merchandise trade has virtually been collapsing.

Today, the Korean government reported a 4.2% drop in year on year March exports (chart from investing.com)

This marks a back to back decline with a seeming acceleration in the rate of the downtrend.

Considering that China, US Japan, Hong Kong and Singapore make up her 5 major export trade partners, aside from possible issues on competitiveness, the alternative and or complimentary explanation for the sluggish exports has been deepening languid performance of economic activities of her trading partners.

Korea’s plummeting exports has been occurring in the face of a sustained battering of her currency the won as shown in the USD-Krw above from google finance

So currency weakness has hardly done anything to improve on Korean exports.

March import data brings about even more bad news.

Korean imports have basically been collapsing. Since late 2014, the rate of decline has been intensifying. 2015 has been dominated by double digit declines!

The import cascade seems like a symptom of the weakening of Korea’s internal demand.

Although consumption spending has been creeping up while retail sales jumped in February following a drop in January 2015, the gist of these spending activities has been financed through household credit.

Considering that merchandise trade (exports and imports) constitute a big segment of her economy (82.4% 2010-2014 World Bank), the above slump signifies a coming squall to her statistical GDP. 

In essence, Korea’s economy has increasingly become dependent on leveraging. And such debt buildup has likewise become a drag to her economic activities, as this seems as being transmitted via the consumers, while simultaneously increasing her risk profile in the context of interest rate, currency and credit.

Korean mainstream press seems worried of the rapid buildup of household debt. From the Korean Times (March 31) [bold mine]

At the end of February, household loans reached an accumulated 522 trillion won after climbing 3.9 trillion won in the first two months, and a combined 66 trillion won in the 2012-2014 period, according to data from the Financial Supervisory Service (FSS).

Escalating worries of possible non-performing loans (NPLs), more than 70 percent of the accumulated household loans were mortgages in the two-month period, Cho said citing FSS data.

So aside from the recent unexpected rate cut two weeks ago, the Finance Ministry launched a bailout program called “relief loans” but was apparently met with skepticism

From the same article (bold mine)

Korea's household debt is on track to rise further after jumping nearly 4 trillion won ($3.6 billion) in the January-February period; while the "Relief Loans" designed to restructure this debt will not be of much help, experts said Tuesday.

"The 40 trillion won Relief Loans are aimed at helping a small portion of households convert their existing mortgages into fixed, low-rate ones, and also allowing them to pay principal and interest together on a monthly basis," Cho Young-moo, an economist at LG Economic Research Institute, said Tuesday.

He said installment payments of principal and interest will help families lower their overall debt over time, but the conversion program is not likely to reduce the country's entire household debt.

The law of demand says that the lower the cost of an activity, the more people will do of it. So by lowering cost of credit (via policy rates) and by providing subsidies or bailouts, one can expect credit activities to expand and aggravate on the existing impairments on Korea’s private sector balance sheets…until these collapses under its own weight.

A further bad news has been that the HSBC manufacturing PMI has posted 49.2 this March implying a contraction in manufacturing activities. The March survey supports the developing slack in Korea’s internal and external economic activities.

And given the apparent deterioration in her economy and the policy choice to subsidies internal debt at the expense of the currency, many South Koreans have been looking overseas to chase for yields.

The other option has been to chase yields in domestic stocks regardless of the intensification of her risk profile. 

So we have another parallel universe, rising stocks amidst a deepening of economic stagnation.

In McKinsey Global Institute's recent report “Debt and (not much) deleveraging”, they note of the burdensome effects of debt to economic activities:

High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions

It’s not just about empirics, rather this has been based on economic axiom. Here is my version:

Debt represents the intertemporal distribution of spending activities. Borrowing money to spend simply means the frontloading of spending. The cost of debt financed spending today is spending in the future. Debt will have to be repaid at the expense of future spending. Of course there are productive and non-productive debts. But policies of financial repression via zero bound rates tend to promote non-productive ‘speculative’ and consumption debts.

As I have been saying here, there are multiple tinderboxes to trigger a global economic storm. 

South Korea has been just as vulnerable as the many others.  Yet signs of deterioration has been spreading everywhere.

Tick Tock. Tic Tock.