S. Korea’s credit risk hits 5-yr high on fund market crunch, trade deficit

S. Korea’s credit risk

South Korea’s credit default swap has jumped to the highest level in five years amid growing risks from rising global interest rates and continuing trade deficit.

Credit default swap for the country’s five-year government bonds rose 4 basis points from a day earlier to 70 basis points on Oct. 31, according to the Korea Center for International Finance and the financial industry. That’s the highest in almost five years. It also compares with Japan’s CDS of 31 basis points, even though South Korea has a higher credit rating.

South Korea’s exports posted a drop 5.7 percent from a year ago last month, while imports rose 9.9 percent. The country reported a trade deficit for a seventh straight month, the first time since May 1997.

Another reason for the rise in Korea’s credit risk is the weak corporate bond market. While the government announced plans to provide about 50 trillion won worth of liquidity into the market, it’s not enough to ease concerns among foreigner investors, according to Park Sang-hyun, an analyst at HI Investment & Securities, adding that the ``China run’’ effect has also added to the negative sentiment in the market.

While Park said South Korea isn’t at a crisis given that its CDS is lower than other countries in Europe, he said it will be important to watch for any improvement in the fund market to ease.

Experts say that should the fund market remain weak it would eventually affect South Korea’s credit rating, weaken the won and cause another outflow of foreign investment from the stock market. Last month, net purchase of stocks by foreigners was more than 3 trillion won on the benchmark Kospi.

A researcher at Korea Capital Market Institute said that the fund market needs to show signs of improvement and drastic measures on energy supply are needed to reduce the country’s trade deficit.

Park at HI Investment also said that the situation could worsen for South Korean companies should the Federal Open Market Committee (FOMC) raise interest rates next month.

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