South Korea

Growing close to potential

Country Rating BB1

Strengths

  • Firmly established democracy 
  • Advanced Economy with high per capita income
  • Sound Financial sector
  • Ample foreign exchange reserves
  • Low external debt
  • Strong business environment

Weaknesses

  • Geopolitical risk stemming from North Korea
  • Economic vulnerabilities due to external dependency
  • Weak corporate governance
  • Ageing population

 

Economic Overview

Reduced political uncertainties and rising exports improve the outlook


Economic growth is set to prove firm in 2017 at +2.8%. Exports should gather pace in line with higher global demand. The last presidential election helped to stabilize the political situation and confidence is slowly recovering. The policy-mix would remain accommodative to help consolidate growth momentum through a rise in investment.  Private consumption growth should pick up speed but at a gradual pace, limited by a high household debt (96% GDP).

Risks to our baseline scenario stem from both domestic and external sources. Domestically, reducing households leverage and addressing property market imbalances will be crucial for creating a sustainable and safe growth environment. Externally, economic risks include slower global trade growth and downward pressures on the currency following a rise in policy rate in the US. Politically, tensions with North Korea and with China are still a matter of concern. Relations with the latter deteriorate as South Korea agreed on deploying the US Terminal High Altitude Area Defence (THAAD) anti-missile system on its soil. This has resulted in unofficial economic sanctions from Beijing such as the boycott of Korean cosmetics or TV shows.

 

A balanced policy mix


Public finances are sound and do not pose a material risk to the economy. The fiscal stance is accommodative and the government is considering a supplementary budget (+KRW11.2) with measures to boost job creation (+5.4tn), support households (+2.3tn) and local government (+3.5tn). Public debt should remain at an acceptable level just below 40% GDP, a low rate compared to other advanced economies. The central bank is set to adopt a more prudent monetary stance as growth is gaining traction and inflation is closing in on the +2% target. Policy rate will likely be kept at a low level in the near future to foster growth. However, a gradual tightening could be considered especially from 2018. 

 

External risks are limited 

The external position is solid. External debt is low and the current account surplus is large (7% GDP in 2016). The economy has built strong buffers over the past years including a solid positioning in high-tech sectors and competitive exporting companies. These ensure a large export base (goods exports account for USD495bn in 2016). Main factors of vulnerability stem from a rise of protectionist measures from main trading partners (China, U.S.), and strong competition from neighboring countries such as Japan.