Hantoo Securities "Due to US Reciprocal Tariffs Impact... Lowers South Korea Growth Forecast to 1.1% This Year"

Korea Investment & Securities has downgraded its economic growth forecast for this year from the previous 1.4% to 1.1%, citing domestic and international conditions such as higher-than-expected 25% U.S. reciprocal tariffs and delays in resolving political uncertainties. The firm advised investors to adopt a selective approach depending on tariff sensitivity, recommending domestic sectors including defense, entertainment, distribution, and finance, which are considered 'tariff-free zones.'

Moon Da-woon, a researcher at Korea Investment & Securities, stated in a report on the 4th, "Although semiconductors are excluded, 78.3% of Korea's 2024 exports to the U.S. (127.8 billion KRW), including major export items such as automobiles, are subject to (reciprocal) tariffs imposed by the Donald Trump administration." Moon added, "Of course, the tariff scale can be adjusted through future negotiations, but if no additional negotiations occur, the maximum damage to Korean exports is estimated to be about 20 billion USD."

Accordingly, Korea Investment & Securities lowered its growth forecast for this year to 1.1%. This figure is 0.3 percentage points lower than the previous 1.4%, significantly below the 1.4% suggested by the Bank of Korea under the 'pessimistic scenario' of an intensifying tariff war.

Moon assumed a basic scenario where exporters pass on 12.5% of the tariff cost to prices, estimating export damage at 14.4 billion USD. He also projected that exports to the U.S. would decrease by 11.3% year-on-year, with overall exports increasing by only 0.3%. He explained, "The worsening external conditions due to reciprocal tariffs will reduce this year’s growth rate by 0.2 percentage points compared to previous forecasts. Additionally, due to prolonged domestic demand weakness caused by delayed resolution of political uncertainties in the first quarter, the growth forecast for this year has been revised downward."

Following the announcement of reciprocal tariffs, the dollar index, which measures the value of the U.S. dollar against six major currencies, declined, but the movement of the USD/KRW exchange rate is expected to be limited. Moon predicted, "In the short term, a weak dollar phase will unfold, easing domestic downward pressure and likely lowering the USD/KRW level. However, even if there is a sharp short-term drop, concerns about U.S. inflation will cause the dollar to rebound, partially reducing the decline."

In the bond market, a steepening trend is anticipated. Yoo Sang-sang, a researcher at Korea Investment & Securities, said, "As downside pressure on the economy increases, market expectations that the Bank of Korea will have no choice but to cut interest rates despite exchange rate and household debt burdens are spreading. The scale of fiscal policy, including supplementary budgets, is also likely to expand." He forecasted a steepening trend with rising long-term bond yields and recommended buying if long-term yields rise due to fiscal policy issues such as supplementary budgets.

However, the Bank of Korea’s Monetary Policy Committee (MPC) meeting in April is expected to maintain the current rate. Yoo said, "The MPC is likely to hold rates steady while monitoring the impact of U.S. tariffs and responses from other countries, with a rate cut highly probable at the May meeting." He maintained a forecast of one rate cut in May and an additional cut in the third quarter, projecting a total reduction of 2.25% in the Korean base rate within the year.

Alongside this, Korea Investment & Securities suggested that investment strategies by sector should depend on tariff sensitivity in light of the reciprocal tariff impact. Researchers Kim Dae-jun and Park Ki-hoon stated, "The tariffs announced on the 3rd represent the highest burden we must bear, but there is ample possibility for this to decrease depending on negotiations and other factors. Sectors unaffected by tariffs are the top preference, and sectors exposed but not yet confirmed at the 25% rate are the second preference."

They noted, "The sector best able to avoid tariffs is defense, as it has no export products to the U.S. It is a sector to actively buy this year." They also mentioned domestic sectors unrelated to tariffs such as entertainment, distribution, finance, and internet, forecasting these to be relatively stable due to potential domestic demand stimulus amid economic sluggishness. Additionally, pharmaceuticals and semiconductors were cited as second-preference sectors, with the assessment that "depending on negotiations with the U.S. government, these sectors may be less exposed to extremely high tariffs as they provide essential goods to the U.S." Finally, they identified automobiles, parts, and secondary batteries as sectors to avoid.