S. Korea, Taiwan Inflation Fight to Persist as Growth Slows
April 25, 2011, 10:18 PM EDTBy Eunkyung Seo and Chinmei Sung
(Updates with Korean confidence data in ninth paragraph.)
April 26 (Bloomberg) -- South Korea and Taiwan may need to keep raising interest rates as an estimated slowdown in growth last quarter failed to ease inflationary pressure.
South Korea’s gross domestic product expanded 4.2 percent in the three months through March from a year earlier, less than the 4.7 percent pace in the previous quarter, according to the median estimate in a Bloomberg News survey of 12 economists. Taiwan’s growth likely slowed to 5 percent from 6.92 percent, according to the median forecast in a survey of 14 analysts.
While Japan’s record earthquake and China’s monetary policy tightening have increased the risks for Asian exporters including Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co., inflation has accelerated in Taiwan and South Korea amid rising commodity costs and capital inflows. Policy makers in the two economies may raise interest rates several times this year, according to Barclays Capital.
“Increasingly, balancing growth and inflation will be the key challenge facing policy makers,” said Wai Ho Leong, a regional economist at Barclays Capital in Singapore. “Core inflation pressures are intensifying, not just in Korea, but also in Taiwan.”
The Bank of Korea may increase interest rates in May, July and September, while Taiwan’s central bank may do so in June, September and December, Leong said. South Korea will release its GDP data at 8 a.m. Seoul time tomorrow while Taiwan’s report will come out at 4 p.m. local time on April 29.
Inflation Risks
China raised interest rates this month, joining nations from Thailand to India that have boosted borrowing costs in 2011 to fight inflation. Japan’s March 11 quake may have caused as much as 25 trillion yen ($304 billion) in damage while disrupting the global supply chain, according to the government.
In South Korea, “the overall economic risks are still tilted towards inflation in our view,” said Ma Tieying, an economist with DBS Group Holdings Ltd. in Singapore, who expects a Korean rate increase as soon as next month.
Consumer-price growth has exceeded the Bank of Korea’s 4 percent ceiling since the start of the year, prompting the bank to raise rates by a quarter of a percentage point each in January and March.
‘War’ on Inflation
The country’s consumer confidence in April rebounded from a 23-month low and inflation expectations reached the Bank of Korea’s 4 percent target ceiling, data released today by the central bank showed.
South Korean President Lee Myung Bak declared a “war” on inflation in January, urging policy makers to contain inflation at 3 percent this year. Inflation hit a 29-month high in March.
In Taiwan, the government’s consumer-price growth forecast of 2 percent this year exceeded the benchmark interest rate level, central bank Governor Perng Fai-nan said after raising borrowing costs for a fourth straight quarter last month. Taiwan’s inflation accelerated to 1.41 percent in March, the fastest in four months.
Sales abroad have climbed to record levels in both South Korea and Taiwan. In South Korea, where exports of goods and services accounted for 52 percent of the GDP in 2010, overseas shipments reached an unprecedented $48.6 billion in March.
‘Headwinds’ for Exports
Taiwan’s export orders climbed 13.37 percent to a record $38.99 billion in March, a government report showed last week. The island’s exports accounted for 67.65 percent of its GDP in 2010, according to the statistics bureau.
In the second quarter, “exports are likely to face headwinds due to Japan’s earthquake, China’s tightening, and fiscal troubles in Europe and U.S.,” said DBS’s Ma. Economic growth is likely to rebound in the second half in both South Korea and Taiwan, as “the oil price shock fades and Japan’s reconstruction efforts start.”
Shortages in South Korea of imported goods such as electronics parts from Japan after the quake “will crimp output and thus harm GDP growth,” said Katrina Ell, a Sydney-based economist at Moody’s Analytics Australia Pty Ltd.
“Taiwanese manufacturers of LCD display panels, semiconductor equipment, autos and parts will also suffer as components are mostly imported from Japan,” said Ell.
Strengthening Currencies
Taiwan Semiconductor Manufacturing, the world’s largest contract manufacturer of chips, lowered its forecast for revenue growth in the global chip-industry after last month’s Japan earthquake hurt expected demand.
South Korea’s Samsung Electronics, the world’s biggest maker of televisions and flat-screen monitors, said this month its first-quarter operating profit dropped 34 percent due to rising competition in tablets and phones.
Export growth may also be damped by the two economies’ strengthening currencies, which authorities are tolerating because they limit oil price gains in local currency terms. Leong at Barclays said he expects the won to strengthen to 1,025 against the dollar and Taiwan’s dollar to advance to 28 against its U.S. counterpart, by the year-end. The won dropped 0.33 percent to 1,085.10 per dollar as of 10:48 a.m. in Seoul today and the Taiwanese dollar fell 0.1 percent to 28.949 as of 9:26 a.m. local time, according to Taipei Forex Inc.
The Bank of Korea projected on April 13 that the economy will expand 4.5 percent this year and inflation will accelerate to 3.9 percent. Taiwan’s government in February forecast economic growth of 4.92 percent and projected inflation will climb to 2 percent from 0.96 percent in 2010.
--With assistance from Sarina Yoo in Seoul and Jay Wang in Singapore. Editors: Ken McCallum, Lily Nonomiya
To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net Chinmei Sung in Taipei at csung4@bloomberg.net.
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
