major macro economic indicators
|2014||2015 (f)||2016 (f)||2017 (f)|
|GDP growth (%)||3,3||2,6||2,8||2,5|
|Inflation (yearly average) (%)||1,3||0,7||1,0||1,9|
|Budget balance (% GDP)||0,4||0,3||0,8||1,1|
|Current account balance (% GDP)||6,0||7,7||7,5||6,5|
|Public debt (% GDP)||35,9||37,9||38,9||39,2|
(e) Estimate (f) Forecast
- Diversified industrial base
- Leader in high-quality electronics
- Excellent education system
- High level of public R&D spending
- Growing Korean investment in China, Vietnam and India
- Health public finances
- Steel, textile and naval industry affected by Chinese competition
- High volume of commodities imports
- High household and small business debt levels
- Ageing population
- Unpredictability of North Korean regime
Activity expected to slow in 2017
In 2016, growth edged up, but in 2017 activity is expected to slow, still hampered by sluggish external demand and the country's structural weaknesses (ageing population and inefficient SME sector). Nonetheless, household consumption is expected to rebound in response to stimulus measures introduced by the government, such as tax incentives on car purchases, despite higher inflation. Household debt remains high (163% of disposable income in 2015) and will continue to dampen activity. Finally, we could see unemployment rising in connection with the restructuring of the naval industry, despite the setting up of a Support Fund.
Investment is also expected to benefit from the stimulus plans aimed at supporting activity and, in particular, house building. However, the restructuring announced in June 2016 in the shipbuilding and shipping sectors will affect investment (20% reduction in capacity by 2018). Nevertheless, this restructuring is accompanied by a fiscal stimulus plan and the Bank of Korea also cut its key rate by 25 basis points in June 2016 to cushion the effects of the plans. Finally the SMEs are likely to continue to benefit from support.
The South Korean economy is strongly export-oriented and will remain constrained in 2017 by sluggish world demand and the economic slowdown in China - the Middle Kingdom receiving a quarter of South Korean exports.
Despite the steps announced by the government, the economy will still be affected by the weakness of SMEs (specifically their lack of competitiveness) and the aging population. Furthermore, it will continue to be a two-speed economy, with dynamic industrial conglomerates - the chaebols – but with a low productivity services sector. The transparency of the chaebols, characterised by family control and hereditary succession, remains limited.
Financial situation still under control
The implementation of the various stimulus packages has not aversely affected the public finances. This is because most of the extra budget is allocated to national priorities: increasing the economically active population, stimulating the economy and strengthening security. The growth in expenditure is offset by tax increases such as that on cigarettes. Moreover, the government intends to widen the tax base by taxing the informal sector, which is estimated to be equal to a quarter of the formal economy. As a result, the budget surplus is expected to continue to grow. The public debt will remain sustainable and below the levels observed in most other OECD countries. Nonetheless, contingent liabilities and debt of public-sector companies represent 10% and 30% of GDP respectively.
The current account balance is expected to dip somewhat, but will remain broadly in surplus in 2017. The value of oil imports is expected to rise in response to the increase in the price per barrel, and exports of goods and services are expected to continue to be hit by the drop in Chinese demand.
In this context, the level of foreign exchange reserves will remain satisfactory. However, the won still depends on capital flows and could depreciate against the dollar with the tightening of US monetary policy. Nonetheless, the strength of the current account surplus and the weak correlation between the Korean bond market and global risk aversion should help limit movements in the currency. Finally, the high level of household debt is a risk for the banking sector.
Impeachment of President Park
While presidential elections are scheduled for December 2017 and the Constitution forbids President Park Geun-hue from standing for a second term, on 9 December 2016 the National Assembly voted to impeach Ms Park on grounds of corruption, abuse of power and breach of her constitutional obligations. She has also been strongly criticised for her management of the Sewol ferry disaster and the Coronavirus epidemic. The constitutional Court now has 6 months to confirm the impeachment motion. In the meantime, power has been entrusted to the prime minister. If the Court confirms the impeachment, presidential elections will be organised within 60 days.
Meanwhile, the risk of tensions with North Korea persists. Despite President Park Geun-hye's wish for dialogue and the adoption of a so-called 6-point agreement in August 2015, relations between the two countries took a turn for the worse in early 2016. North Korea conducted a nuclear test in January and a ballistic missile test in February. Since then, its rhetoric has been very aggressive. Repeated threats made by North Korea illustrate the instability of relations between the two economies. The UN adopted new sanctions in February 2016.
Last update : January 2017