Forex Flash: South Korea: The 5-30 rule - Nomura

FXstreet.com (Barcelona) - Nomura economist Young Sun Kwon believes that Korea´s still-high financial leverage suggests that room for macro stimulus is limited and he expects targeted measures to boost domestic demand, but not a rate cut.

Young begins by noting that the financial crisis in large economies are usually preceded by a sharp rise in the leverage ratio, by 30% of GDP in five years and is known as the “5-30 rule”. He writes, “Korea‟s debt-to-GDP ratio rose to 260% in 2012, but its five-year rolling change fell from 61 percentage points (pp) in 2009 to 41pp in 2012. The Asian currency crisis and the Lehman crisis both occurred after the five year change in Korea‟s leverage surged to 50pp.”

Further, he adds that Korean policymakers have succeeded in slowing the increase in leverage, at least for now, but the still high figure(both in the level and change of leverage) suggests that Korea´s macro policies should remain focused on managing risk rather than accelerating growth, even if growth improves only modestly. He finishes by writing, “Given our view that incoming data should improve slightly, we believe the Bank of Korea is wary of accelerating a growth recovery via further rate cuts, as this could further raise the economy‟s leverage ratio. We maintain our call for no rate cuts in 2013.”