South Korea: Risk Assessment


Country Risk Rating

A2 The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.

Business Climate Rating

A2 The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.
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Strengths

  • Diversified industrial base
  • Leader in high-quality electronics
  • Excellent education system
  • High level of public R&D spending
  • Growing Korean investments in China, Vietnam and India
  • Healthy public finances

Weaknesses

  • Steel, textile and naval industry affected by Chinese competition
  • High import content of raw material imports
  • High level of indebtedness of households and small companies
  • Aging population 
  • Unpredictability of the North Korean regime

Current Trends

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Growth expected to pick up slightly in 2016

After easing off slightly in 2015, growth should pick up a little in 2016. Household consumption should rebound after the effects of the Coronavirus epidemic that struck the country in the second quarter of 2015. However, household debt, which represents almost 145% of disposable incomes, will continue to slow activity. Investment, in particular in construction, is expected to remain dynamic. Companies will continue to benefit from budget support from the government. In responding to the slowdown recorded in 2015, the government implemented a USD $19 billion (1.5% GDP) recovery plan in July. This included in particular fiscal exemptions, spending on infrastructure construction and aid for the SME sector. The 2016 budget also includes measures aimed at strengthening social protection and the development of services. In addition, inflation is likely to remain below the central bank target, which will allow it to continue with its relaxed monetary policy. It cut (-50 bp) its policy rate twice in 2015 to what is now an historic low. The Korean economy, strongly export orientated, will continue to be constrained in 2016 by the slowing of the Chinese economy which is the destination for a quarter of Korean exports. On top of this, the weaknesses of the yen and the euro work against Korean products.

The agriculture sector is expected to recover following the severe drought in the summer of 2015. There is likely to be some restructuring of companies, in particular in the shipbuilding sector, struggling under a heavy debt burden. 

Lastly, the Korean economy will remain at two speeds with the dynamic industrial conglomerates – the chaebols– but also a low-productivity service sector. Furthermore, the transparency of the chaebols, characterized by family control and hereditary succession, remains limited.

Financial situation under control

In 2015, the country recorded a small public deficit as a result of the exceptional expenditure during the summer. In 2016, despite a larger budget, the public accounts should return to surplus. Public debt will remain sustainable and below the levels of most other OECD countries. Contingent commitments and SOE debt however respectively account for 10 and 30% of GDP.

The current account is expected to weaken but still remain in surplus in 2016. The value of natural gas imports, oil and coal should fall thanks to low prices and this should help offset the impact of the slowdown in exports of goods and the worsening in the balance of services linked with the slowdown in China.

In this context, FX reserves will remain at a satisfactory level, giving the country good resistance to any sudden capital withdrawals. As there was only a very limited impact on the won, compared to other Asian currencies, with the capital withdrawals seen in many emerging economies during the summer of 2013 and in 2015, the tightening of US monetary policy should not have a major impact on its value. The reasons for this can be found in the size of its current account surplus and the weak correlation between the Korean bond market and the global aversion in risk and other emerging bond markets. Finally, the high level of household debt does represent a risk for the banking sector.

Restarting dialogue with North Korea

The dangers of tensions with North Korea remain. However, the desire for dialogue demonstrated by its President, Park Geun-hye, elected in 2013, seems to be bearing fruit. In August 2015, the two countries reached a so-called “6 point” agreement. In October, the first point was honored with the reunification of separated families. Meetings of high ranking officials should now be held and economic cooperation between the two countries should be promoted. Nevertheless, the border region is still extremely tense and South Korea will have to loosen the “24 May” sanctions imposed in 2010 if it wants to increase its trading links with North Korea. On top of this, the repeated threats made by North Korea serve to illustrate the inherent instability of the relations between the two countries.

In terms of internal politics, further social conflicts are likely, in particular because of the precarious state of many workers. On top of this the President has been subject to criticism for her management of the Sewol shipwreck and the epidemic. As the Prime Minister resigned following the sinking, the President carried out a reshuffle in April 2014. The new Prime Minister, however, resigned in April 2015, following suspicions of corruption that forced Mrs. Park to appoint the 3rd Prime Minister since the start of her term of office. Despite abundant criticism towards Park Geun-hye, the ruling party is likely to win the parliamentary elections in 2016, given that the opposition is seriously divided.

Source:

Coface (01/2016)
LOW RISK............ACCEPTABLE RISK............ VERY HIGH RISK

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