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Korea's GDP Growth in the Fourth Quarter of 2021

The Korean economy finished the year 2021 in strong shape, with its gross domestic product (GDP) growing by an estimated 4% despite growing concerns about the rapid spread of Omicron. That is the highest growth rate in 11 years, suggesting that the economy is recovering fast in the face of an unrelenting pandemic. The economy regained the recovery momentum in the fourth quarter of 2021, recording a GDP growth of 1.1% versus 0.3% in the previous quarter, thanks to consumer spending pickup, export gains, and fiscal support. The growth rate for the fourth quarter in annual terms was 4.1%.

GDP Growth (2019-2021)
* Source: Bank of Korea as of January 25, 2022

Consumer spending grew by 1.7% in the fourth quarter due to eased social distancing measures, which led to an increase in consumption in the hospitality, dining, and transportation sectors. Government spending also increased by 1.1%, driven by a rise in health care expenditure. For the whole year, private consumption improved by 3.6%, representing a strong recovery from the previous year's 5% contraction, while government spending increased by 5.5% from a year earlier.

In the October - December period of 2021, exports expanded by 4.3% from three months earlier, backed by semiconductors and petroleum products, while imports also rose by 4.3% due to increased inbound shipments of crude oil and chemical products. In annual terms, exports bounced back from a contraction in 2020 and jumped by 9.7% in 2021 - the fastest annual pace in 11 years. Imports also surged by 8.4% in 2021 compared to a 3.3% drop in 2020.

Construction investment grew by 2.9% in the final three months of 2021 thanks to increased investment in both building construction and civil works, but declined by 1.5% for the entire year. Equipment investment increased by 8.3% in 2021 versus 7.1% in 2020, although the fourth quarter performance was lackluster with a 0.6% decline compared to the previous quarter.

In 2022, the Korean economy is expected to have another strong year of recovery from the pandemic-induced contraction of 2020, supported by consumer spending growth, export recovery, and improving business investment. However, rising inflation, supply chain disruptions, and the build-up of household debt cast a cloud over the growth outlook for 2022.

Quarterly Economic Growth
* Figures in ( ) refer to year-on-year growth rates. * Source: Bank of Korea as of January 25, 2022

Benchmark Interest Rate Outlook for 2022

The Bank of Korea (BOK) has been under pressure for interest rate hikes amid growing concerns over rising inflation and household debt. The central bank raised its benchmark interest rate by 25 basis points to 1.25% in mid-January 2022, which was the third interest rate hike during the COVID-19 pandemic following its previous rate hikes in August and November 2021. The rate had been kept at a record low of 0.5% since May 2020. The latest rate increase has brought the policy rate back to the pre-pandemic level.

BOK Benchmark Interest Rate (2010-2022)
* Source: Bank of Korea as of Jan 14, 2022

Throughout the year 2022, more rate increases are likely to come as the BOK Governor hinted at the possibility of further rate hikes via an online press briefing on January 14. Whether the central bank will further raise the base rate depends on economic conditions including the pace of GDP growth and inflationary pressure. Indeed, growing inflation was a major factor that led the BOK to make a series of rate adjustments recently. In 2021, consumer prices rose by 2.5%, the sharpest rate in a decade, which compared with a 0.5% increase in 2020. The upward trend has continued into early 2022, driven by surging fuel and food prices. As the Consumer Price Index (CPI) gained by 3.6% in January 2022 from a year earlier, it remained above the BOK’s 2% target for a 10th straight month. It was the fourth consecutive month that consumer prices rose by more than 3%. Annual inflation may jump to an 11-year high of around 3% in 2022.

Investment companies from both home and abroad released forecasts that the BOK will lift interest rates further by the end of this year. In early February, JP Morgan and Goldman Sachs both announced their expectations that the BOK will additionally raise its benchmark rate twice to 1.75% in the second half of 2022. In mid-February, Hana Financial Investment Company said it expected the central bank in Korea to continue its monetary policy normalization and increase the rate to 2% by the end of 2022, which is 0.25%p higher than its earlier forecast of 1.75%.

The Growth of ESG Bond Issuance in Korea

The issuance of bonds focused on environmental, social and governance (ESG) matters has been sharply rising in Korea. The value of ESG bonds issued in 2021 reached KRW 20.3 trillion, accounting for around 30% of the total issuance of corporate straight bonds worth KRW 67.2 trillion, as a growing number of issuers have been seeking to meet demand from investors who are paying greater attention to climate risks and other ESG issues.

The growth of the ESG bond market is also being fueled by the COVID-19 pandemic and the government's commitment to achieving national carbon neutrality goals by 2050. Another driver behind the growth of ESG bond issuance is a lower cost of borrowing. Companies can take advantage of ESG bonds in a rising interest rate climate because such bonds are often tied to a lower lending rate.

There are three major types of ESG bonds: green, social and sustainability bonds. Green bonds are fixed-income instruments designed specifically to support environmentally friendly projects. Social bonds target to raise money for projects with the aim of creating positive social outcomes, such as education, transportation, and healthcare. Sustainability bonds are a mixture of green and social bonds.

Companies from a wide range of industry sectors issue green, social and sustainability bonds in a bid to demonstrate their commitments to carbon footprint reduction and social responsibility. The manufacturing industry increasingly relies on ESG bond issuance to raise capital. ESG bonds make up 70.3% of steelmakers' debt issuance, while the portions of ESG bonds were 45.5% and 31% for the power generation and petrochemical sectors, respectively, according to data from Shinyoung Securities Company.

Financial companies also borrow an increasing amount of money via ESG bonds. The banking sector in Korea issued ESG bonds of KRW 11 trillion in 2021, up from KRW 4.2 trillion in 2020. Social bonds accounted for the largest share (67%) of the total ESG bonds issued by banks in 2021, followed by sustainability bonds (22%) and green bonds (11%). It is becoming more and more mainstream for financial companies to incorporate ESG factors into debt capital markets, as a growing number of financial companies in Korea are embracing ESG principles and setting sustainability goals for the future.

Composition of ESG Bond Issuance by Banks
* Source: Yonhap Infomax

The ESG bond market is poised for continued growth going forward as corporate boards and executives will face mounting pressure to demonstrate their corporate sustainability efforts. Many investors increasingly believe that a company's focus on sustainability performance can be a measure of innovation and corporate success as well as an indicator of good and responsible management.