SEOUL: Exports fell by 13.8% y/y in December, much weaker than expected (consensus: -11.7%), following a one-time vessel delivery lift in November (Nov: -4.8% y/y; Oct: -16.0%). The release marked the weakest annual export performance in level terms since 2010, with exports falling by 7.9% y/y in 2015 (2014: 2.3%; 2013: 2.1%). On a seasonally adjusted m/m basis, exports gave back most of the November gain, declining by 4.1% m/m sa (Nov: 5.6%; Oct: -6.7%). Oil remained the dominant headwind, as lower crude prices depressed shipment value throughout the year.
However, weak external demand also dragged the headline rate lower. Excluding oil-related distortions, exports still fell 3.4% y/y (2014: +3.3%). The problem of lacklustre demand was exacerbated by the much slower-than-expected inventory clearance. Indeed, the inventory-to-shipment ratio shows no sign of improvement, with the IS ratio ticking higher to 1.29x in November (Sep and Oct: 1.28x).
In the absence of a meaningful festive season lift, the extended period of inventory overhang amid sluggish external demand continues to hurt manufacturers’ confidence. All in, It is believed that the broad trend of weak external demand but stronger domestic services activity is unchanged. The softness in trade and production is also likely to keep the BoK’s monetary stance accommodative in 2016.
All in, the underlying trend of a challenging external environment will likely extend into 2016 – marked by slower inventory clearance and weak production, although a lower base from 2015 may help improve headline growth in exports and production at the margin on a yearly comparison basis.
“We maintain our view that the BoK will deliver another 25bp rate cut in Q1, ahead of the National Assembly elections in April 2016. We also believe a weak KRW bias will resume, as the government continues to encourage state entities to recycle the current account surplus by stepping up overseas loans and investments, or by stockpiling essential minerals and fuels”, says Barclays.
