A Warning Sign
The credit default swap (CDS) premium of the five-year foreign exchange stabilization bond (FESB) issued by the South Korean government rose 4 basis points to 70 on Oct. 31, the highest since Nov. 14, 2017. The figure was 21 basis points on Jan. 3 this year and topped 50 on Sept. 23 before reaching 60 on Oct. 10. In other words, South Korea’s national economic and corporate credit risks are continuing to increase.
Likewise, the spread of the five-year USD-denominated FESB rose from 49 to 52 on Oct. 31. This means a spread of 0.52 percentage point needs to be provided as compared with the coupon rate of the five-year Treasury bond. The figure was 39 on Jan. 3.
The increase in CDS premium is because South Korea’s trade balance is deteriorating, risks attributable to high reliance on the Chinese economy are not disappearing, and its short-term fund market conditions are worsening mainly in the corporate bond market.
Still, experts point out that the current CDS premium is not a risk, given that it amounted to 691 during the global financial crisis 14 years ago. “The figure showed a rapid increase recently, and yet it is much lower than that during the 2008 crisis and the European fiscal crisis in 2011,” one of them explained, adding, “The current level is close to that during the U.S.-China trade disputes in 2017 and 2018.”