SOUTH KOREA

Efficient policies support the (mild) recovery

LOW RISK for enterprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP	USD1642.383bn (World ranking 12, World Bank 2019)
Population	51.7mn (World ranking 28, World Bank 2019)
Form of state	Democratic Republic
Head of government	Moon Jae-in (President)
Next elections	2022, presidential

Advanced economy with high per capita income
Sound financial sector
Solid external position (low external debt, ample foreign exchange reserves, etc.)
Strong business environment
Firmly established democracy

Geopolitical risk stemming from North Korea
Economic vulnerabilities due to dependency on external demand
Slowly improving but still weak corporate governance
Aging population

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Early exit from the Covid-19 crisis

South Korea's containment of the Covid-19 epidemic was deemed successful without the need to implement a full nationwide lockdown. Even so, the heavily trade-dependent economy experienced a technical recession in H1 2020, with the largest q/q contraction in Q2 GDP since the Asian financial crisis. There was nonetheless some encouraging news in the components of GDP, with private consumption in particular unexpectedly growing in Q2. This bodes well for the (mild) recovery path of the South Korean economy going into H2 2020. The outlook for external demand, in particular from China (South Korea’s largest trading partner), for the coming quarters is positive, thanks to recovering global growth. South Korea’s domestic demand will continue to be supported by the timely fiscal stimulus. Overall, we expect GDP to contract by -1.5% in 2020 (after expanding by +2.0% in 2019). The economic recovery should result in GDP growth reaching +3.6% in 2021. According to our forecasts, GDP should come back to pre-Covid-19 levels after mid-2021.

Macro-policies: Strong stimuli

South Korea has exhibited a good track record of macro-policy management in recent years. Buffers have been built, with for example the Bank of Korea (BOK) being one of the first central banks in Asia to start a tightening cycle in 2017. In the wake of the Covid-19 crisis that started at the beginning of 2020, the BOK was swift to react, cutting the policy rate by 75bp in total to the record low level of 0.5% by May. At the July policy meeting, BOK policymakers unanimously decided to keep the policy rate unchanged. While continued asset purchases, lending schemes and liquidity injections are likely, we do not except any further changes in the policy rate for the remainder of the year. This is because policymakers aim to support the economy and also limit negative side effects (such as rising household debt and housing price).

On the fiscal side, there is leeway for stimulus: South Korea’s public finances are strong and government debt is low (c.40% of GDP in 2019) compared to other high-income economies. The fiscal balance is set to deteriorate as authorities have stepped up expansionary measures to counter the shock of Covid-19. Three supplementary budgets amounting to KRW59tn (3.0% of 2020 GDP) have been passed as of early July 2020. Stimulus measures aim to boost domestic demand (infrastructure spending, household cash transfers, etc.), support the labor market and financially assist SMEs and vulnerable industries. The stimuli should be enough to bring the South Korean economy back to a mild recovery path and we expect no further aggressive easing in 2020.

Solid external position

South Korea’s external debt is relatively low (26% of GDP at the end of 2019) and the current account surplus is large (+3.6% 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 (USD659bn in 2019). The main factors of vulnerability stem from a rise of protectionist measures from main trading partners (China, U.S.) and strong competition from neighboring economies (Japan, Taiwan, mainland China etc.).

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% Taiwan

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