South Korea’s economy slowing down as unemployment rises

The Parliament has a record budget proposal for 2019 of RM1.7t, of which 5% will be set aside for jobs creation

By FUNDSUPERMART RESEARCH TEAM / Pic By BLOOMBERG

The Group of 20 Summit (G-20) and a financial budget proposal potentially will have a significant impact on South Korean equities and investors’ confidence.

While minimum wage in the country has increased by 16% at the turn of this year and boosted domestic consumption, President Moon Jae-in’s policy has backfired as small businesses struggle to afford the mandatory wage hikes. As a result, workers are laid off to maintain costs.

There are ongoing plans to raise the minimum wage by 10.9% next year as Moon continues to strive to be the “jobs president”.

Looking at how things have turned out this year, the minimum wage plan would be a major concern as South Korea’s economy continues to slow and unemployment could be increasing.

However, the Parliament has a record budget proposal for 2019 of 470.5 trillion won (RM1.74 trillion), of which 23.5 trillion won (5%) will be set aside for jobs creation.  In total, 162.2 trillion won (34.5%) will be directed to the health, welfare and labour sectors.

Almost half of South Korea’s 2017 GDP was driven by consumption.  The budget proposal could help propel the economy forward as South Koreans get a boost to spending power.

The government is also increasing support for small and medium enterprises to afford the minimum wage hike.

The deadline to approve the budget was last Sunday, but at the time of writing this article, we have yet to hear any news of the outcome. An approval would likely bolster economy confidence.

Another huge concern on investors is the impact of the ongoing trade war between the US and China on South Korea.

Following the G-20 summit, US President Donald Trump has agreed to leave the 10% tariffs on US$200 billion (RM834 billion) worth of Chinese goods unchanged and will not raise the tariff rate to 25% at the turn of the new year. This spells good news for most Asian equities, including South Korean stocks.

China is South Korea’s largest trading partner, with exports to China comprising about 24.8% of 2017 total exports. Net trade with China contributed to about 2.85% of South Korea’s GDP in 2017. Looking at recent data in 2018, it seems like the trade spat has not affected South Korean exports yet.

In the next 90 days, US and China will proceed to negotiate to improve trade relations, the result of which will determine investor sentiment for East Asian and South Korean equities.

The benchmark Kospi Composite Index has taken quite a beating this year due to earning misses, trade tensions and economic problems, falling about 15% year-to-date as of Nov 30. Its forward 12-month price-earnings ratio for financial year 2019 traded at 8.4 times as of Nov 30.

Despite the good news, there are still some issues weighing on South Korea’s prospects. The 10.9% minimum wage hike is a steep one and it may be too early as the economy is still coping with the recent hike.

For investors who wish to tap into the growth opportunities South Korean equities offer, we recommend them to allocate not more than 20% of their equity budget for supplementary exposure.