[Economic Insight] A Spark of Hope Appears in the Dark Tunnel

Since the martial law crisis triggered by former President Yoon Suk-yeol in December last year, the South Korean economy has been on a downward trajectory. Externally, Donald Trump's tariff war, and internally, the extreme confrontation between the ruling and opposition parties and political instability?evident in the "acting president after acting president" system?have been holding back the economy.

However, even amid these numerous negative factors, there are signs of hope.

According to the "Trends in Foreign Securities Investment" report released by the Financial Supervisory Service, foreign investors have been net sellers in the stock market for eight consecutive months through March this year. From December last year to March this year, they recorded a net sale of stocks totaling 8.802 trillion won. However, in the bond market, net investment (net purchase minus maturities) shifted from -2.381 trillion won in December last year and -1.66 trillion won in January this year to a positive 5.668 trillion won in February and 5.874 trillion won in March. In April this year, foreign investors also made net purchases of about 35 trillion won in 3-year and 10-year government bond futures.

The 5-year government bond CDS (Credit Default Swap) premium, which had risen to around 45bp (1bp = 0.01 percentage point) in early April due to tariff uncertainty under the Trump administration, fell to 31.25bp as of May 7.

The KRW-USD exchange rate, which had soared to the 1,480 won range in early April, dropped to the 1,380 won range on May 7, marking its lowest level in six months since November last year. Although the closing price at 2 a.m. on May 9 rose to 1,406.9 won, it remains much better than a month ago, returning to pre-martial law crisis levels.

The international price of West Texas Intermediate (WTI) crude oil fell below the $60 mark, reaching its lowest level in four years.

The consumer price index has remained stable at around 2%. If the exchange rate does not rise significantly from current levels, the Bank of Korea is highly likely to lower the base interest rate at the Monetary Policy Committee meeting on May 29.

If the 13.8 trillion won supplementary budget, which passed the National Assembly on May 1, is combined with a base rate cut, the combination of expansionary fiscal policy and accommodative monetary policy will be complete. This means that the two pillars of macroeconomic policy?fiscal policy and monetary policy?will be fully mobilized to respond to the economic situation.

After the presidential election on June 3, regardless of which side wins, the inauguration of a new administration is likely to ease political instability to some extent. The anticipation surrounding the launch of a new government is expected to have a positive effect on the economy.

July marks the conclusion of the Korea-U.S. tariff negotiations. Given the progress made in last month's 2+2 talks, including cooperation in the shipbuilding industry, the outcome is unlikely to be too unfavorable. Even if the results are somewhat disappointing, the finalization of the negotiations will remove the uncertainty that the economy dislikes most.

Internationally, on May 8 (local time), the United States announced a trade agreement with the United Kingdom that is significantly more relaxed than previous arrangements. The United States and China, which had effectively severed trade relations by imposing tariffs exceeding 100% on each other, will hold their first official negotiations in Switzerland on May 10. The fact that both sides are seeking an exit from the trade war is also positive for the South Korean economy.

Recently, economic growth has been very sluggish. The quarter-on-quarter growth rate fell from 1.3% in the first quarter of last year to -0.2% in the second quarter, barely staying positive at 0.1% in both the third and fourth quarters, before dropping back to -0.2% in the first quarter of this year after three quarters.

The outlook for the second quarter of this year is also not bright, but there is cautious optimism that the economy may bottom out and begin to recover afterward.

It is often said that the economy is driven by sentiment. While it is true that our economy is passing through a dark tunnel, if we continue to move forward with determination, the end of the tunnel will eventually come into view.