Although the US and South Korea are likely to establish a working group to explore the deployment of the Terminal High Altitude Area Defense (THAAD) missile defence system in the latter country, Seoul is likely to postpone the actual introduction of THAAD, owing to Chinese opposition and concerns about a regional arms race. With parliamentary elections due on April --, conservative South Korean politicians are likely talking up THAAD to bolster their support. ...However, we expect the central bank to cut interest rates to lend support to the government s initiatives, and now forecast a --bps cut to -.-- over the coming months. The BoK kept its base rate steady at -.-- following its February -- monetary policy meeting, but we retain our forecast for the central bank to cut its base rate by --bps to -.-- over the coming months to support exports and the government s fiscal stimulus measures. The South Korean won will weaken against the US dollar in the near term due to falling real interest rate expectations amid growing exter- nal headwinds and still subdued domestic demand. Accordingly, we have downgraded our ---- end-year KRW forecast to KRW-,---/ USD from KRW-,---/USD previously. Over the long term, depre- ciatory pressures will be capped owing to a strong current surplus and large foreign exchange reserves, which reflect the won s slight undervaluation against the USD.
...South Korea s ---- real GDP growth came in at -.- , slightly higher than our forecast of -.- . We maintain our real GDP forecast for ---- at -.- due to our expectations for only a modest pickup in economic momentum. ...We maintain our real GDP forecast for ---- at -.- due to our expectations for only a modest pickup in economic momentum. High levels of household debt will undermine the govern- ment s plans to drive growth through domestic demand, while external demand is likely to remain weak due to the slowdown in the Chinese economy. South Korea s economy grew by a seasonally adjusted -.- quarter-on-quarter (q-o-q) in Q---, slowing considerably from the -.- expansion registered in the previous quarter. ...In our view, manufacturing activity is likely to remain anaemic due to slowing external demand for Korean products. However, the outlook for the services sector is likely to improve as the country s tourism sector recovers from the outbreak of Middle Eastern Respiratory Syndrome (MERS) in Q---.
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