South Korea: Risk Assessment
Business Climate Rating1
Growth should stabilize in 2015
In 2014, economic growth slightly accelerated but activity should slow down in 2015 despite a stimulus plan of 20 trillion wons (1.3% GDP) aiming to support public companies and exporters as well as private-sector demand affected by the Coronavirus epidemic that hit the country in Q2 2015 (the end of the epidemic was announced in July 2015). Business confidence and the sectors linked to tourism have also suffered the effects of this epidemic. In particular, the stimulus measures provided for a cut in income tax intended to increase household disposable income, the construction of infrastructures and additional financing for R&D. These measures should boost demand and particularly household consumption, which was also affected in the spring of 2014 by the sinking of the Sewol ferry. Nevertheless, demand will remain restricted by the high level of household debt and the slowdown in revenue growth. In order to stimulate the property market, the government has decided to relax the prudential regulations for property loans. Households can now borrow up to 70% of the value of the property and 60% of their income can be used to service the debt. Nevertheless, the property market is struggling to pick up.
The highly export-based Korean economy will remain constrained in 2015 by the slowdown in the Chinese economy and the weak yen, which puts Korean products at a disadvantage compared to Japanese goods. In 2015, the harvest will be affected by the severe drought of summer 2015. Furthermore, inflation is situated below the central bank's target, enabling it to maintain an accommodative monetary policy. Since the start of 2015, the central bank has cut the key rate by 25 basis points in March then in July in order to boost domestic demand.
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
The 2015 budget provides a 6% increase in spending. It is the biggest increase since 2009. The budget will nevertheless remain balanced, with a sustainable level of public debt and well beneath the levels seen in other OECD countries. Debt held by state-owned needs to be monitored: it reached 35% of GDP in 2012.
Regarding the external accounts, the current account balance will stay in surplus. The value of natural gas, oil and coal imports will fall thanks to the drop in prices and will help offset the impact of slower exports.
In this context foreign exchange reserves will remain at a satisfactory level, providing the country with the strength to resist sudden capital flight. The won has not been overly affected by the US Federal Reserve’s announcement during summer 2013, compared with other Asian currencies, thus the expected tightening in US monetary policy should not have any major impact on its exchange rate. This is mainly explained by the robustness of the country’s current account surplus and capital controls implemented in 2012. Finally, high household debt level, at over 160% of disposable income (the OECD average is 130%), represents a risk for the banking sector.
Risk of heightened tensions with North Korea
Despite the wish to enter into dialog on the part of President Park Geun-hye, elected in 2013, there is a continuing danger of increased tensions with North Korea on the North Korean nuclear issue. Pyongyang has carried out missile tests which landed in the sea in March and April 2014 and the country has restarted its Yongbyon nuclear facility enabling it to produce weapons grade plutonium. On top of this, the frequent threats made by North Korea are clear examples of the precarious relations between the two countries.
Regarding domestic politics, new social unrest is to be predicted, especially because of the precarious status of many workers. Furthermore, the president has been criticized for her handling of the Sewol shipwreck and the epidemic. With the prime minister having resigned following the shipwreck, the president appointed a new prime minister in April 2014. Nevertheless, he resigned in April 2015 following suspected corruption forcing Mrs. Park to appoint the third prime minister since the start of her term. Despite a number of criticisms aimed at Park Geun-hye, the party holding power won the local elections in June 2014. Furthermore, the mid-term parliamentary elections which were held in July 2014 were also won by the president's party (11 seats out of 15 at stake).
- 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
- 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
- Unpredictable of North Korean regime