Default risk expected to fall after third North-U.S. summit

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Default risk expected to fall after third North-U.S. summit

The promise of talks restarting between the United States and North Korea, and an apparent truce in the U.S.-China trade war will likely lower South Korea’s default risks and help the won appreciate against the dollar, according to analysts.

Korea’s credit default swap (CDS) premium - essentially an insurance premium against Korea defaulting on its debt - has been on the rise after the talks between the United States and North Korea broke down in February, on top of mounting trade tensions between Washington and Beijing.

But Moon Jeong-hee, an economist at KB Securities, predicts that with the latest agreement for the resumption of talks, the index could go down.

“Korea’s CDS recorded 28 basis points at the end of February, but the failure of the meeting in Hanoi [Vietnam] and the reignited U.S.-China trade tension in May pushed the rate up to 38 basis points,” Moon said.

“The recent figure stood at 32 basis points, but given that [U.S. President Donald] Trump’s visit was unexpected, the number will likely dip below the 30 mark and stabilize,” the economist said.

The won will also likely benefit from the recent breakthrough in geopolitical and economic tensions.

“The won could also gain ground following the Panmunjom meeting,” Moon said, projecting the won to decline to 1,150 won against the dollar from the current 1,154 won.

Lee Young-hwa, an economist at Kyobo Securities, echoed the view, adding that the main driver for the stronger won lies in the weakening dollar.

“The dollar will be weakened as the United States faces fizzling economic momentum and a growing need to cut its benchmark interest rate,” Lee said, predicting the same range as Moon.

Other analysts say that easing tensions from the trade war will further strengthen the possibility of the Fed cutting its key interest rate in July, which will subsequently increase the likelihood of the same move from the Bank of Korea.

“As a truce has been made, the Fed will likely move toward a rate cut in July with the major uncertainties lifted,” said Choi Seo-young, an economist at Samsung Futures.

Korea’s stock markets, however, were barely moved by the two landmark events on Monday.

The main Kospi bourse edged down 0.04 percent to close at 2,129.74 compared to the previous trading day, while the Kosdaq, the tech and bio-heavy index, added 0.79 percent to close at 696.00.

The subdued market response is attributed to the small portion of stocks directly related to possible economic cooperation with the North while many investors are still worried about looming sources of disagreement between the United States and China.

“The stocks linked with economic projects with the North account for a small slice of the Kospi and Kosdaq markets, so the impact [of the U.S.-North meeting] will be limited on the stock markets,” Moon said.

The analyst said that 3.5 percent of stocks on the Kospi and 3.7 percent on the Kosdaq are related to the North.

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