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South Korea: Investment to remain strong - Natixis

Analysts at Natixis believe that investments in South Korea are likely to remain strong on the back of a cyclical upturn and new leadership

Key Quotes

“We believe that South Korea is unlikely to be materially impacted by the heightened North Korea-related tensions as it is an escalation but not a change in the status quo, and so, we argue, will be perceived by investors. In other words, we believe that investors – both domestic and foreign – will continue to rule out a worst-case scenario, namely that of a military conflict.”

“The most relevant channel for spillovers from North Korea’s military tensions to the South Korean economy is investment as it is more negatively affected by uncertainty than consumption and obviously more volatile. Our take is that investment will not be very affected for a number of reasons. Domestically, the country is undergoing a cyclical upturn thanks to improved global trade, loose monetary policy, and domestic sentiment on domestic politics. Capital expenditure has increased very rapidly since 2016, and we do not expect this process to be derailed.”

“Second, foreign capital has continued to flock to Korea, notwithstanding the heightened risk, although at a slower pace than in other Emerging Asia economies. Furthermore, the country actually does not depend on external funding for its investment due to sizeable current account surpluses (7% of GDP in 2016). The stickiness of foreign capital flows in South Korea both on an absolute and relative basis shows that confidence has not deteriorated materially, which implies that investors are not pricing in a worst case scenario, in line with our view. Finally, as if this were not enough, South Korea’s government passed a fiscal stimulus package that aims at boosting growth.”

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