Daiwa: Korea Economy: Trade remains on track

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Korea Economy
Trade remains on track, and lower inflation precludes near-term rate hikes


Summary
• Robust trade numbers and moderating inflation suggest that the Korean
economy remains in the pink of health. We expect export growth to moderate to
10-15%YoY in 1H11, and the policy rate to remain stable in 1Q11.



Fundamentals
• Korea’s monthly trade surplus narrowed to US$3.6bn in November (from
US$6.5bn in October), as exports expanded 24.6%YoY (versus 27.6%YoY in
October) but imports accelerated sharply to 31.2%YoY growth (from 21.3%YoY
in October). Export strength was aided by an acceleration in exports of electronics
(19.1%YoY in November, 18.1%YoY in October) led by a 43.9% YoY surge in
semiconductor exports in November  (32.9%YoY in October). Automobile
exports also stayed robust, expanding 32.7%YoY in November (31%YoY in
October). Rapid export growth to Japan (80.2%YoY in November), ASEAN
(32.5%YoY in November), and Europe (34.7%Y) mitigated the impact of
decelerating exports to the US (25.2%YoY in November, 50.9%YoY in October),
China (25.2%YoY in November, 26.6%YoY in October), and Taiwan
(29.2%YoY in November, 42%YoY in October). Strong exports should drive
industrial production in November, and  renewed import strength suggests
domestic demand is still strong in Korea. We expect slower export growth next
year, but to be sustained at 10-15%YoY in 1H11.
• CPI inflation moderated to 3.3%YoY (4.1%YoY in October), with lower inflation
in the major segments of food (11.2%YoY in November, 14.1%YoY in October),
clothing (0.1%YoY in November, 2.1%YoY in October), housing (2.2%YoY in
November, 2.8%YoY in October) and  transport inflation (2.6%YoY in
November, 3.5%YoY in October). Month-on-month food prices declined 4% (the
largest MoM decline since October 2002) and the headline index declined 0.6%
(the largest MoM decline since November 2004). The Bank of Korea (BoK)
raised its policy rate by 25bp earlier  this month to 2.5%, and with growth
moderating, we expect rates to remain unchanged through March 2011.