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Low Money Supply Weighs on South Korea Economy

BoK has raised calls for the government to carry out more proactive fiscal measures to sustain the economy as the bank has already used all available monetary resources at its disposal
IHS Markit expects the country’s industrial growth to trend towards zero and provide minimal contribution to economic growth in the first quarter.IHS Markit expects the country’s industrial growth to trend towards zero and provide minimal contribution to economic growth in the first quarter.

South Korea had the lowest money supply in two years and 10 months despite its low interest rate, according to data by the Bank of Korea released on Wednesday.

In February, cash and current assets that can be immediately converted into cash for circulation in the market totaled 2,420.3 trillion won, up 5.9% from a year earlier. This was the slowest increase since April 2014 when the supply rate climbed 5.5% year-on-year, news outlets reported.

The rate increased around 9% in April 2015, the highest backed by interest rate cuts and a series of fiscal stimulus. However, it started to fall in March last year amid heightened risks of excessive household and corporate debt.

A low rate typically leads to a slump in consumption and investments, thus slowing down the economy. A high rate spurs the economy although it runs the risk of resulting in inflationary pressures.

Banks have been reluctant to extend credit to private companies especially after late 2015 amid Daewoo Shipbuilding & Marine Engineering's accounting fraud. Currently, the shipbuilder is struggling to remain afloat.

This scandal has not only weighed down the shipbuilder's credit rating, but also investor confidence in the shipping and shipbuilding industries.

In a national assembly hearing, however, BoK Governor Lee Ju-yeol said sufficient liquidity is provided to the market because the increased rate of the monetary supply is higher than the country's growth rate.

Instead, the BoK has constantly raised calls for the government to carry out more proactive fiscal measures to sustain the economy as the central bank has already used all available monetary resources at its disposal.

Export Recovery on Thin Ice

Despite a sustained rebound in exports since November, South Korea's manufacturing ended the first quarter with even more contraction, thanks to a souring relationship with its biggest trading partner China and political uncertainty at home, Nikkei reported.

The Nikkei South Korea Manufacturing Purchasing Managers' Index dipped further to 48.4 in March from 49.2 the previous month—marking its eighth consecutive month of decline. A figure above 50 indicates expansion, while anything below signals deterioration.

The main drag on the index came from a more pronounced shrinkage in output against falling orders at home and abroad since June. According to London-based IHS Markit, which compiled the survey, some companies noted their sales to China, which buys a quarter of South Korea's exports, had been upset by political tensions surrounding Seoul's deployment of the US-made Terminal High Altitude Area Defense system as China's economic retaliation escalated.

More alarmingly, companies in the beleaguered country were axing staff at the most drastic clip since December 2008—the sub-index slipped to 47.2 last month—while hiking prices of their goods at the quickest pace since April 2011 in the face of higher raw material costs.

Young Sun Kwon, senior economist at Nomura International, explained in a note on April 4 that the inferior performance of South Korea's PMI, especially compared to its trading partners, which are generally in up-trends, was attributable to the relative weakness in its shipbuilding and automobile sectors.

"These two sectors, which have high multiplier effects on other manufacturing sectors, face strong competitiveness headwinds," said Young, noting that the country's largest automaker, Hyundai Motor, continued to see losses in its global market share, and the top three shipbuilders—Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering—only met 31% of their sales targets last year.

IHS Markit's senior economist Paul Smith expects the country's industrial growth to trend towards zero and provide minimal contribution to economic growth in the first quarter. But Joseph Zveglich, director at Asian Development Bank's macroeconomics research division, pointed out that the country will likely bottom out this year and return to higher growth the next as fallout from the impeachment of the country's former president Park Geun-hye recedes.

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