South Korea

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A1

LOW RISK

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD1530.8bn (World ranking 12, World Bank 2017)
Population 51.5mn (World ranking 27, World Bank 2017)
Form of state Republic
Head of government Moon Jae-in (President)
Next elections 2020, legislative
  • Firmly established democracy
  • Advanced Economy with high per capita income
  • Sound Financial sector
  • Ample foreign exchange reserves
  • Low external debt
  • Strong business environment
  • Geopolitical risk stemming from North Korea
  • Economic vulnerabilities due to external dependency
  • Weak corporate governance
  • Ageing population

Trade headwinds

Economic growth is set to slow to +2.2% in 2019 (after +2.7% in 2018). The first half of the year has been tough for the South Korean economy. Weak global trade growth and lingering trade uncertainties have impacted the country through lower exports and lower investment growth. We expect economic growth to pick up some speed in the second half of the year, supported by expansionary policies.  Monetary policy will likely turn accommodative (-25bp policy rate cut) in the next months. Fiscal policy is already supportive (+9% increase in fiscal spending included in 2019 budget, the highest since the global financial crisis; a supplementary budget of KRW6tn enacted) and we expect the effects to materialize in the second part of the year. In a context of a decelerating global trade, this favorable policy mix will help to sustain growth by boosting domestic demand.

Macro-policies: The benefits of having buffers

Macro-policies have been appropriate so far and have helped the economy build some buffers to fight back in case of a downturn. The BOK was one of the first central banks in Asia to raise its policy rate in 2017. And the institution pursued its tightening cycle in 2018. The reasons behind this move were a relatively firm economic growth and inflation outlook, the need for reducing household debt (100% of GDP) and a continued tightening cycle in the US. Things have changed in H1 2019: The growth outlook has deteriorated (GDP contraction in Q1 2019), inflation is subdued (+0.6% y/y in Jan-April, clearly below the +2% BOK target) and the US Fed has paused its tightening cycle. Against this background, the South Korean monetary authority will likely adopt a more dovish stance. 

The country’s public finances are strong and government debt is low (approx. 40% of GDP) compared to other high-income economies. The fiscal balance is set to deteriorate as authorities have stepped up expansionary measures. Yet it will likely (i) remain in a safe range (not exceeding -3% GDP) and (ii) strengthen domestic activity. In fact, the measures that have been announced aim at supporting job creation and wages, and improving social safety nets and SME innovation. 

Solid external position

South Korea’s external debt is relatively low (28% GDP) and the current account surplus is large (+4.7% of GDP). The economy is well positioned in global supply chains with a strong edge in high-tech sectors and competitive exporting companies. These ensure a large export base (USD605bn in 2018). The main factors of vulnerability stem from a rise of protectionist measures from main trading partners (China, US) and strong competition from neighboring countries such as Japan. 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
China 25%
1
21% China
United States 13%
2
12% Japan
Hong Kong 7%
3
11% United States
Vietnam 7%
4
5% Germany
Japan 5%
5
4% China, Taiwan Province of

Trade structure by product

(% of total)

Exports Rank Imports
Electrical machinery, apparatus and appliances, n.e.s. 19%
1
14% Petroleum, petroleum products and related materials
Road vehicles 13%
2
13% Electrical machinery, apparatus and appliances, n.e.s.
Telecommunication and sound recording apparatus 7%
3
4% Telecommunication and sound recording apparatus
Other transport equipment 7%
4
4% Specialised machinery
Petroleum, petroleum products and related materials 5%
5
4% Metalliferous ores and metal scrap

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Contact Mahamoud Islam

Senior Economist for Asia

mahamoud.islam@eulerhermes.com

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