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Boston, MA -- (SBWire) -- 01/07/2014 --The initial concerns about the impact of Abenomics on South Korea's economy have proven to be unfounded. Factors other than exchange rate valuations have enabled South Korea to maintain its export competitiveness. Going forward, we believe that any concerns towards the implications of Abenomics on Korea should centre around the structural reforms that Japan is hoping to undertake.

The upside surprise in South Korea's Q313 real GDP print has led some observers to believe that Korea's economic recovery is on a solid footing. While we do not discount further upside for the rest of 2013, we remain less sanguine towards Korea's economic trajectory in 2014. Korean trade momentum is likely to face continuing headwinds from China.

With elevated levels of household debt already weighing on the Korean economy, leverage within the corporate sector now appears also to be becoming a problem. Debt ratios of an increasing number of chaebols have risen to alarming levels and the recent failure of a number of conglomerates has sparked fear of further meltdowns. To us, a key risk stems from the cross-shareholding strategy that many chaebols employ in order to insulate themselves against market pressures and consequently guard against hostile takeover bids.

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Given our relatively less optimistic outlook for the economy, we expect inflationary pressures to remain similarly subdued. In line with this, we do not expect to see any aggressive tightening in the Bank of Korea's monetary policy going forward, and are projecting a single 25 basis points hike in the benchmark interest rate to 2.75%, which we believe will likely come in the latter stages of 2014.

We expect South Korea's possible entry into the Trans-Pacific Partnership (TPP) to dominate the country's political landscape. While we are yet to be able to ascertain the economic benefits of Korea joining the trade pact, we are of the view that it is likely to be a disadvantage if it chooses not to join the group, given that its regional competitors are seeking entry into the TPP.

Key Risks To Outlook

Downside Risks To Economic Growth Forecast: Should we see a sharper-than-expected downturn in the global economy or even an implosion in South Korea's household debt market, we would certainly expect to see a substantial weakening in its exports sector, which, in turn may push the economy into a pronounced recession.

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