South Korea

Growing close to potential

BB1

LOW RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD 1377.9bn (World ranking 11, World Bank 2015)
Population 50.6mn (World ranking 27, World Bank 2015)
Form of state Republic
Head of government Moon Jae-in
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

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.

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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