South Korea can sustain export-led growth despite mounting concerns that the strong local currency could hurt the price competitiveness of Korean products, according to HSBC.
The Korean won has strengthened rapidly in recent months on the back of a strong current account surplus. This prompted worries among Bank of Korea and Finance Ministry officials as the stronger won poses “downside risks” to the country’s export outlook, according to HSBC.
But the bank added that the Korean economy can sustain an export-led recovery in a strong won environment.
“We believe that as long as the relative dollar price of Korean exports does not increase significantly, the recent strength in the won will not derail Korea from its export-led recovery path,” the bank said Monday in its latest global research report.
But in order to stay price competitive, Korean exporters may face tighter profit margins, the bank added.
The bank also predicted that the Bank of Korea is likely to leave its benchmark interest rate unchanged at 2.50 percent at the monthly monetary committee meeting this week.
The BOK has kept the rate unchanged since May 2013 after scaling it down 0.25 percentage point to 2.5 percent.
The report forecast that the BOK would raise the policy rate in the third quarter of 2014 despite the won’s appreciation.
HSBC noted that the BOK delivered rate hikes even when the won was strong against both the U.S. dollar and Japanese yen from 2005-2008.
“We expect the central bank to hold its policy rate at 2.50 percent on Thursday, and deliver a 0.25 percentage point hike in the third quarter of 2014,” the report said.
Meanwhile, Moody’s reported Monday that Korea’s economic fundamentals remain strong, and the impact from the Sewol ferry disaster on domestic demand will likely be “short-lived.”
The global rating agency predicted the country’s gross domestic product to expand 3.8 percent this year, unchanged from its previous forecast.
By Oh Kyu-wook (email@example.com)