Gov’t bonds at new low in period of mourningSwings in Korean government bonds fell to a record low as grieving over the nation’s worst ferry accident in four decades wrecked spending and weakened bets for benchmark interest-rate increases this year.
Ten-day historical volatility for three-year debt fell to 2.48 percent on Friday, an all-time low in data compiled by Bloomberg dating back to August 2000. That compared with 4.72 percent for similar Chinese bonds. President Park Geun-hye has said private consumption weakened since the Sewol ferry sank April 16, killing nearly 300. Bank of Korea Governor Lee Ju-yeol kept borrowing costs at 2.5 percent on Friday.
Woori Investment and Securities and Daewoo Securities doubt economic growth can match the BOK’s 4 percent projection and pave the way for the first rate rise since 2011. While sales at retail, leisure and food businesses slid as the nation mourned, export revenues were eroded by the won’s 4.1 percent gain this quarter, the most among 31 major currencies.
“The ferry disaster will have a bigger impact than expected, and the strong won is also a blow to the economy,” Park Jong-youn, an analyst at Woori Investment, said. “The market overestimated the likelihood of a rate hike this year.”
Daewoo Woori Investment expects Asia’s fourth-largest economy to grow 3.8 percent this year and predicts the earliest BOK rate rise in the third quarter of 2015. Daewoo Securities forecasts 3.6 percent expansion and has delayed its call for an increase in borrowing costs to the first quarter of next year, according to Yoon Yeo-sam, an analyst at the primary dealer.
The benchmark rate is supportive of growth and the next step will be an increase, Governor Lee said after last week’s policy review. He also said domestic risks appear to be rising after the ferry accident. Fourteen out of 27 economists said they expect the seven-day repurchase rate to be lifted at least one time this year. ING Groep NV forecasts a cut, while the rest see no change.
Nomura Holdings’ forecast for a BOK increase in December risks being delayed if sluggish consumption persists, Kwon Young-sun, a Hong Kong-based economist at Japan’s largest brokerage, said in a report on Friday.
The government is closely watching how much and how long the ferry accident’s impact will last on the economy and whether extra steps are needed, Vice Finance Minister Choo Kyung-ho told reporters yesterday.
Sales at department stores increased 1.3 percent and 0.2 percent from a year earlier in the third and fourth weeks of April, respectively, compared with 4.5 percent and 2.3 percent in the first and second weeks, a Friday government statement showed. Growth in tourist arrivals on Jeju island, the Sewol’s destination, slumped to 6.5 percent from a year earlier in the second half of April from a 16.7 percent gain in the first.
Park called for pre-emptive measures to support the economy and companies affected by the ferry disaster, according to the Blue House website. These include cheap loans to small and midsize companies and front-loading of the 2014 budget, the government said in a Friday statement.
The central bank raised its growth forecast from 3.8 percent on April 10. The won reached 1,020.97 per dollar on Friday, the strongest level since August 2008, while the yield on 10-year sovereign bonds fell to a six-month low of 3.43 percent the same day.
The BOK’s optimism isn’t shared by consumers, according to Samsung Asset Management, which oversees 127 trillion won ($124 billion).
“There has been some good data like exports and some large corporates may have felt the improvement, but the recovery shown in figures and what people feel in actual life are different,” Lee Do-yoon, head of fixed income at Samsung Asset in Seoul, said. “Although it will be difficult for Korea to not follow the trend of raising interest rates seen in countries like the U.S., I don’t expect the hike to come soon.”
Slowing private spending and a stronger won are unlikely to trigger a change in the trajectory of the BOK’s monetary policy, according to Deutsche Bank AG, which does not predict a rate increase until the first quarter of 2015.
“Consumption could recover in one or two months following the government’s efforts, including front-loading the budget,” said Seong Kiyong, a Hong Kong-based interest-rate strategist at the German lender. “A strong won also indicates Korea’s fundamentals are strong.”
Overseas investors bought 3.8 trillion won more Korea equities than they sold in April, ending five straight months of outflows, the Financial Supervisory Service said in a May 8 statement. Foreign funds boosted holdings of local-currency debt by 1.3 trillion won, the most since July 2013.
The Sewol accident will cut consumption in the second quarter, denting full-year growth by 0.08 percentage point, according to a May 8 report by the Korea Institute of Finance, a think tank for local lenders.
“With the ferry disaster hurting consumer sentiment, the BOK may find it pretty difficult to raise rates anytime soon,” Yun Chang-hyun, who as president of the Institute is also an adviser to the Korean central bank and Finance Ministry, told reporters Thursday.