Click to listen highlighted text!

Click to reach LMF La mia finanza web site

  Click to listen highlighted text! On April 27, North and South Korea brokered peace talks in a joint summit, the first of its kind in more than a decade. After the Korean War ended in July 1953, an armistice was signed to create the Demilitarized Zone to separate North and South Korea, however no peace treaty was signed. Both countries are therefore still technically at war, engaged in a “frozen conflict”.Last week, North Korean leader Kim Jong-Un walked beyond the demarcation line in the Demilitarized Zone to shake hands with South Korean President Moon Jae-in. This was Kim’s second trip and the first time both leaders shake hands since the end of the Korean War. One of the most important topics on the agenda was a lasting peace agreement on the Korean Peninsula. Both leaders will work together to denuclearize the peninsula in an agreement called the Panmunjon Declaration. The events marked a pause in geopolitical risks in Asia after a tense 2017. The summit will be followed by a meeting between Kim and United States (U.S.) President Donald Trump. Global markets reacted positively to the news. The Kospi Index surged by over the 2500 limit for the first time since February, while the Korean Won appreciated by 11%. However, the optimism was short lived. Why Since Moon Jae-in was sworn in office on May 2017, he made rapprochement with the North his signature foreign policy, moving away from the previous stance of active isolation. The meeting is also the result of shadow talks between North and South Korea ahead of the 2018 Pyeongchang Winter Olympics, helping to lay the foundations for a much needed “détente”. Geopolitical tensions had escalated in 2017 – North Korea implemented a nuclear test in September 2017 as well as missile tests over Japan in August and September 2017 – triggering risk-off sentiment and risking outflows. Finally, the fact that South Korea is playing a more proactive role in managing political risk in its vicinity reflects a strategic shift away from the U.S. by Moon’s administration. South Korea is one of the countries with which the U.S. possesses a trade deficit and so, inevitably, South Korea has been targeted as part of a more protectionist agenda. For example, Korea was included in the list of countries that would be impacted by the tariffs against steel and aluminium exports and it was also affected by tariffs on washing machines and solar panels. Korea was ultimately exempt from the metal tariffs, alleviating the blow, but protectionist measures are antagonizing and U.S. has been erratic in their application. The summit comes right after Kim’s visit to China, the only country that has significant economic ties with North Korea (see Chart). China has succumbed to U.S. pressures, including sanctioning ICT manufacturers that export products containing U.S. components to the country. Other media reports point to a shift in Beijing’s stance towards the North Korean regime (less patient), as an escalation of global tensions came in the midst of an allimportant power for Chinese President Xi Jinping in October. Containing geopolitical tensions in the peninsula is even more important in the context of widening interest rate differentials with the U.S. The Federal Reserve (Fed) hiked rates by 25 basis points in February, triggering portfolio outflows from Korea and exerting depreciatory pressure on the Korean won (KRW). Two more rate hikes are pencilled in for this year according to the implied probabilities of the Fed Fund Future contracts.Meanwhile, the Bank of Korea is expected to keep rates on hold after hiking once last year in order to fend of risks to the growth outlook stemming from weakening external demand and fragile investments. Risks Geopolitical risks have not disappeared: The inter-Korean summit was reminiscent of 2007, when Kim Jong-il ‘promised’ to halt its nuclear programme, with little delivery. Investors need to focus on substantive progress, as geopolitical tensions could return ahead of a potential Trump-Kim meeting. The unpredictability of both leaders is worrying. A potential depreciation of the Chinese yuan will erode the competitiveness of Korean exports. A political win for Moon Jae-in in prevision of local elections: The move constitutes an important political gain for President Moon. This means that the Democratic Party stands a high chance of winning more seats at the National Assembly. A continuation of existing policies is therefore expected. Fiscal policy will remain accommodative. Meanwhile, there is less room to tighten Monetary Policy following from the 25 bps hike in December. No respite on the economic front: Geopolitical risks may have receded, but macro headwinds remain. The Bank of Korea (BOK) is comfortable allowing the KRW to depreciate, as a weaker currency can help to boost exports. The flip side is erosion in purchasing power, which will impact domestic consumption. The KRW will also face depreciatory pressure on widening interest rate differentials, as BOK will likely keep rates on hold to spur investments and relief pressures on heavily indebted households.  Carlos Casanova, Christophe Moulin - Coface

On April 27, North and South Korea brokered peace talks in a joint summit, the first of its kind in more than a decade.

After the Korean War ended in July 1953, an armistice was signed to create the Demilitarized Zone to separate North and South Korea, however no peace treaty was signed. Both countries are therefore still technically at war, engaged in a “frozen conflict”.
Last week, North Korean leader Kim Jong-Un walked beyond the demarcation line in the Demilitarized Zone to shake hands with South Korean President Moon Jae-in. This was Kim’s second trip and the first time both leaders shake hands since the end of the Korean War.

One of the most important topics on the agenda was a lasting peace agreement on the Korean Peninsula. Both leaders will work together to denuclearize the peninsula in an agreement called the Panmunjon Declaration. The events marked a pause in geopolitical risks in Asia after a tense 2017. The summit will be followed by a meeting between Kim and United States (U.S.) President Donald Trump. Global markets reacted positively to the news. The Kospi Index surged by over the 2500 limit for the first time since February, while the Korean Won appreciated by 11%. However, the optimism was short lived.

Why

Since Moon Jae-in was sworn in office on May 2017, he made rapprochement with the North his signature foreign policy, moving away from the previous stance of active isolation. The meeting is also the result of shadow talks between North and South Korea ahead of the 2018 Pyeongchang Winter Olympics, helping to lay the foundations for a much needed “détente”. Geopolitical tensions had escalated in 2017 – North Korea implemented a nuclear test in September 2017 as well as missile tests over Japan in August and September 2017 – triggering risk-off sentiment and risking outflows.

Finally, the fact that South Korea is playing a more proactive role in managing political risk in its vicinity reflects a strategic shift away from the U.S. by Moon’s administration. South Korea is one of the countries with which the U.S. possesses a trade deficit and so, inevitably, South Korea has been targeted as part of a more protectionist agenda. For example, Korea was included in the list of countries that would be impacted by the tariffs against steel and aluminium exports and it was also affected by tariffs on washing machines and solar panels. Korea was ultimately exempt from the metal tariffs, alleviating the blow, but protectionist measures are antagonizing and U.S. has been erratic in their application.

The summit comes right after Kim’s visit to China, the only country that has significant economic ties with North Korea (see Chart). China has succumbed to U.S. pressures, including sanctioning ICT manufacturers that export products containing U.S. components to the country. Other media reports point to a shift in Beijing’s stance towards the North Korean regime (less patient), as an escalation of global tensions came in the midst of an allimportant power for Chinese President Xi Jinping in October.

Containing geopolitical tensions in the peninsula is even more important in the context of widening interest rate differentials with the U.S. The Federal Reserve (Fed) hiked rates by 25 basis points in February, triggering portfolio outflows from Korea and exerting depreciatory pressure on the Korean won (KRW). Two more rate hikes are pencilled in for this year according to the implied probabilities of the Fed Fund Future contracts.
Meanwhile, the Bank of Korea is expected to keep rates on hold after hiking once last year in order to fend of risks to the growth outlook stemming from weakening external demand and fragile investments.

Risks

  1. Geopolitical risks have not disappeared: The inter-Korean summit was reminiscent of 2007, when Kim Jong-il ‘promised’ to halt its nuclear programme, with little delivery. Investors need to focus on substantive progress, as geopolitical tensions could return ahead of a potential Trump-Kim meeting. The unpredictability of both leaders is worrying. A potential depreciation of the Chinese yuan will erode the competitiveness of Korean exports.
  2. A political win for Moon Jae-in in prevision of local elections: The move constitutes an important political gain for President Moon. This means that the Democratic Party stands a high chance of winning more seats at the National Assembly. A continuation of existing policies is therefore expected. Fiscal policy will remain accommodative. Meanwhile, there is less room to tighten Monetary Policy following from the 25 bps hike in December.
  3. No respite on the economic front: Geopolitical risks may have receded, but macro headwinds remain. The Bank of Korea (BOK) is comfortable allowing the KRW to depreciate, as a weaker currency can help to boost exports. The flip side is erosion in purchasing power, which will impact domestic consumption. The KRW will also face depreciatory pressure on widening interest rate differentials, as BOK will likely keep rates on hold to spur investments and relief pressures on heavily indebted households.

coface korea peace talks have muted impact on economic activity


 Carlos Casanova, Christophe Moulin - Coface

Click to listen highlighted text!