South Korean ETF Benefits from Bank of Korea Inflation-Fighting

The South Korean ETF (EWY) jumped 2.6% on Friday as the Bank of Korea has joined other Asian central banks in raising interest rates, placing greater priority on reining in inflation than on maintaining economic growth.

The South Korean central bank unexpectedly increased its benchmark interest rate for the first time in a year, bumping it up by a quarter-point on Thursday to 5.25%, an eight-year high.

But the Financial Times reports that Mr. Kang Man-soo, the South Korean  finance minister, is pushing ahead with the privatization of state-invested companies such as Daewoo Shipbuilding and Marine Engineering, despite slowing growth and intense political opposition. “Apart from exports, everything – including investment, consumption, employment and the current account balance – is showing a trend similar to that of 1997.”

South Korean inflation is at its highest level in almost a decade and Korea will likely record its first current account deficit in 11 years. Unlike 1997, however, the country has ample foreign exchange reserves.

There is ample room for economic deregulation in its financial and service sectors. South Korea’s productivity is 60% below the US level. Service sector productivity is only half that of manufacturing, and has been stagnant for almost 15 years.