South Korea: Risk Assessment
Country Risk Rating
Business Climate Rating
- Diversified industrial base
- Leader in high-end electronics
- High private and public R&D spending
- Good educational system
- Diversified FDIs in Asia
- Competition from China (steel, shipbuilding, electronics)
- High level of household debt
- Ageing population
- High youth unemployment
- Net commodity importer
- Overrepresentation of chaebols in the economy
- Proximity to North Korea
Growth on the back of public spending
Growth will remain sluggish in 2020. Most of the upside will come on the back of budgetary support, with the contribution of net exports improving gradually thanks to a positive base effect in the second half. External demand should remain sluggish despite recent developments surrounding a partial trade deal between the United States and China – its largest trade partner – via supply chain links. This is especially true for semiconductors and displays, South Korea’s largest exports by value. Semiconductor exports suffered from a -25% YOY drop in prices in the first nine months of 2019. Some upside in Q4 is possible, pending developments with the launch of South Korea’s 5G network. Industrial conglomerates (chaebols) will continue to face pressures on the profitability front, leading to slower private investment in ICT, automotive and electronics. Investments into the construction sector will remain especially subdued, on the back of stricter mortgage restrictions to control real estate prices. Nonetheless, another year of expansionary fiscal policy should boost public investment, offsetting the decline in private investment. Domestic consumption will decline over the following quarters, constrained by high household debt levels and a sluggish labor market, featuring high youth unemployment (around 10%). Inflation will likely edge up closer to Bank of Korea’s (BOK) 2.00% target in 2020, on the back of higher food prices. This means that BOK may implement an additional 25 bps interest cut in the first quarter of 2020, but will pause for the remainder of the year. The onus of stimulating the economy will therefore fall on the Ministry of Finance, which will announce more aggressive fiscal stimulus measures, resulting in a budget deficit.
First budget deficit and stable current account surplus
The budget deficit will widen due to a more expansionary fiscal policy. Since the 2.9% minimum wage increase in 2019 did little to boost activity or employment, the 2020 budget will instead focus on infrastructure investment and government expenditure on research and development. Corporate taxes remain amongst the highest in the OECD (at around 30%), contributing to higher tax revenues. In addition, the government is expecting to sell a net KRW 60.2 trillion worth of treasury bonds to finance this deficit, which would be the biggest on record. Despite increased government borrowing, South Korea features moderate public debt levels, amongst the lowest among high-income economies and below the OECD average (85% domestic owned). External debt also remains low, accounting for 25% of GDP. On the contrary, household debt continued to rise in 2019, reaching 93% of GDP or 161% of disposable income. This is amongst the highest in the world and remains a source of concern.
The current account surplus will remain positive thanks to a large trade surplus, in 2020. Export growth should be slightly lower than that of imports, due to mounting trade war ailments. The steadying of relations with China should help by boosting tourist numbers, after plummeting in 2017. Foreign exchange (FX) reserves will remain at a comfortable level, but a combination of KRW depreciation and a narrower current account surplus will limit any upside. Policymakers should not be too concerned about moderate FX depreciation, as the South Korean economy does not have a financing gap, and a weaker won benefits the export sector.
Less wind behind Moon’s sails
President Moon Jae-in secured a victory for the Democratic Party during elections in 2017. His agenda initially focused on improving GDP through measures to boost wages and public employment, while reducing the influence of the chaebols. However, these policies have had limited effects in reducing existing headwinds, leading to a shift in stance that is more sanguine towards the chaebol, which has not gone down well with his electorate. Additionally, a political scandal that resulted in the resignation of Justice Minister Cho Kuk, further contributed to Moon’s decline in the polls, reaching 39% according to a survey by Gallup. President Moon’s drive to engage in a strategic dialogue with Pyongyang has also had mixed results. North Korea is threatening to back away from a 2018 agreement to denuclearize the Peninsula, while ballistic missile tests resumed in late 2019. The Democratic Party may lose support during the legislative elections of April 2020 as a result. Lastly, an ongoing trade dispute with Japan over South Korea’s ruling that Japan pays reparations for Second World War crimes is a lingering threat, as Korean companies depend on Japan for 90% of their demand for key technology imports.