Borrowing costs may be cut as Park seeks growth

Korean three-year bond yields that have held below the policy rate for a month are prompting speculation the central bank will cut borrowing costs as soon as next week as President Park Geun-hye seeks to revive growth.

Yields on government bonds due in December 2015 were at 2.63 percent Monday, the lowest in data going back to August 2000 and 12 basis points less than the Bank of Korea’s seven-day repurchase rate of 2.75 percent. They stayed below the benchmark rate for more than three months before the central bank last reduced borrowing costs in October. The monetary authority will review policy on March 14.

Park pledged in her Feb. 25 inauguration speech to revitalize the economy at a time when Korean exports, which account for more than half of gross domestic product, are under threat from the Japanese yen’s 25 percent plunge against the won in the past six months.

Deutsche Bank AG said last month it expects a 25 basis point cut in March and Goldman Sachs Group said there would be a reduction in the first half, most likely in April.

“We are long on bonds,” said Moon Dong-hoon, who oversees 12 trillion won ($11 billion) as managing director of fixed income at KB Asset Management, adding that he has increased holdings of five-year debt. “Freezing interest rates will be out of sync with policies to be rolled out by the new finance chief.”

Forecast cut

The Korean economy expanded 1.5 percent last quarter from a year ago, matching the slowest pace in three years, official figures show. Industrial production unexpectedly fell in January from December as output of chips and electronic components dropped, Statistics Korea said last month. Exports declined 8.6 percent last month, according to a March 1 report.

The Bank of Korea lowered its forecast for economic growth in 2013 to 2.8 percent on Jan. 11 from an October estimate of 3.2 percent.

Governor Kim Choong-soo held the benchmark seven-day repo rate steady last month. For a second month, the decision wasn’t unanimous. An improved global outlook increases the odds of Korea exceeding this year’s growth target, Kim said, damping expectations for a rate cut.

“Data isn’t strong enough to call it an economic recovery,” KB Asset’s Moon said. “Prices remain subdued, the won is strong, foreign capital continues to flow in, and the new government wants to boost growth. The foreign exchange holds the key to the BOK’s action.”

Supplementary Budget

A supplementary budget may be announced by Park’s administration in March to bolster growth, Deutsche Bank said in a report. Slower expansion warrants monetary and fiscal stimulus, needed to offset the negative impact of a weaker yen, the bank’s economist Juliana Lee wrote. An extra budget of about 10 trillion won will bolster gross domestic product growth by 0.4 percentage point, according to the report.

“The talk of a supplementary budget is a double-edged sword to the bond market as it means an increase in debt sales but also shows the fragile status of the economy,” KB Asset’s Moon said.

Control tower’

“Market players are probably uncomfortable with current yield levels,” said Cha Sang-yong at Kyobo Axa Investment Managers. “Expectations for a rate cut will not die down. If the BOK keeps rates on hold in March, people would think then it will come along in April.”

Newly appointed Finance Minister Hyun Oh-seok, also serves as deputy prime minister for the economy, a move that Barclays said was intended to elevate the finance ministry’s status as an economic “control tower.” Hyun worked for the World Bank and Korea’s finance ministry before becoming head of the nation’s top research body.

Strengthening Won

Global investors have pumped a net $353 million into Korean local-currency bonds so far this year following inflows of $6.4 billion in 2012, according to fund researcher EPFR Global. Consumer prices increased 1.4 percent in February from a year earlier, the fourth month in a row they have advanced less than 2 percent.

The KDI said in its semi-annual economic report last year that monetary policy should be used more actively to help stabilize the economy as inflationary pressures remain subdued.

The plunging yen has eroded the competitiveness of exporters such as Samsung Electronics, which said in January that currency gains could trim its operating profit by 3 trillion won this year. Kia Motors reported a 51 percent slump in operating profit the same month and said it expects a difficult year. Bloomberg