{"id":2195800,"date":"2022-05-02T17:54:28","date_gmt":"2022-05-02T08:54:28","guid":{"rendered":"https:\/\/www.nknews.org\/pro\/?p=2195800"},"modified":"2023-04-05T16:12:37","modified_gmt":"2023-04-05T07:12:37","slug":"what-to-expect-from-the-south-korean-economy-under-yoon","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2022\/05\/what-to-expect-from-the-south-korean-economy-under-yoon\/","title":{"rendered":"What to expect from the South Korean economy under Yoon Suk-yeol"},"content":{"rendered":"

South Korea is closer to the center of the world\u2019s industrial gravity than much of the rich world, insulating it from the more inflation and supply-side shocks that currently affect much of the world.<\/p>\n

However, long-term prospects for the country do not appear positive. A declining population and already high levels of household<\/a> indebtedness mean that the country risks Japan-style stagnation.<\/p>\n

Recent projections<\/a> from the Korea Economic Research Institute (KERI) indicate that the country will run large deficits under the new Yoon administration. Large at least by the standard of countries that do not have a reserve currency (see IMF projections here<\/a>), with the country projected to become the third most indebted non-reserve currency country in the OECD.<\/p>\n

This would appear to give the new government less fiscal room to maneuver, especially if we consider the country\u2019s medium-term growth outlook. Projections from the Korea Institute of Finance point<\/a> to potential growth rates falling to around 1.5% in 2025 and below 1% in 2030.<\/p>\n

South Korea\u2019s declining fiscal position points to broader secular trends. With the lowest birth rate in the OECD, low rates of net migration<\/a>, and increasingly rapid aging of the population, the country\u2019s long-term growth prospects appear grim without new engines of growth.<\/p>\n

This will make the incoming Yoon administration\u2019s industrial and migration policies all the more important. Industrial policy could boost investment and longer-run growth prospects, while migration policies can help stem the problems associated with an aging and declining workforce by allowing more talent in.<\/p>\n

It is unclear what the Yoon administration\u2019s migration policies will be, but the transition committee for the new administration has said it will focus on the following sectors<\/a> with industrial policy: next-generation energy, biotech, aerospace and defense, artificial intelligence and smart agriculture. It remains to be seen what impact this will have on these sectors, however.<\/p>\n

The Yoon administration will need to weigh up how to boost output and employment while also dealing with the country\u2019s record and still rising household<\/a> debt levels.<\/p>\n

\"\"

Yoon Suk-yeol delivers a speech after being elected as South Korea\u2019s next president (March 10, 2022) | Image: Yoon Suk-yeol\u2019s presidential campaign team<\/p><\/div>\n

MONEY SUPPLY<\/strong><\/p>\n

Government data shows<\/a> that the main sources of inflation on the producer side are imported raw materials and intermediates. Consumers expect<\/a> consumer price inflation to hit 3.1% over the next year, with inflation for last year at 2.5% overall<\/a>, these are still modest rises compared to much of the OECD<\/a>.<\/p>\n

The size<\/a> of the [South Korea\u2019s] money supply, measured in broad and narrow terms<\/a>, has increased less rapidly than the OECD average, and fiscal stimulus during 2020 and 2021 has been far more limited in its impact on the country\u2019s finances than in many<\/a> advanced economies.<\/p>\n

This gives the central Bank of Korea (BOK) some room to maneuver with respect to interest rates. The BOK\u2019s new governor-designate has voiced concern about prices, so the BOK is likely to raise interest rates from their current 1.5%.<\/p>\n

One issue that the Yoon administration will grapple with immediately is the prospect<\/a> that the U.S. Federal Funds rate will overtake the BOK\u2019s base rate (the gap is currently 0.75%-1%). This might exert downward pressure on the value of the won against the dollar, making imports more expensive, hitting\u00a0 South Korean consumer and producer prices. The downward pressure may have partially resulted from the exodus of foreign portfolio investors.<\/p>\n

There is also the likely impact of Russia\u2019s invasion of Ukraine on inflation resulting from rising oil and food prices. Monetary policy has little direct influence on this, but they may also exercise pressure on the BOK to act more aggressively.<\/p>\n

In such circumstances, it appears unlikely the National Assembly will pass a large additional supplementary budget<\/a> (stimulus package), especially given reductions<\/a> in the country\u2019s bond market early in April, which required BOK intervention.<\/p>\n

THE CAPITAL EXODUS<\/strong><\/p>\n

The prospects for a further weakening of the won are also weighing<\/a> on South Korea\u2019s financial markets. Both equities and bond markets have been hit by selloffs in recent months, and companies face problems with raising funds on the bond markets.<\/p>\n

At the start of the year, around 34% of KOSPI\u2019s market capitalization was held by foreign investors, i.e., the total value of the country\u2019s major stock index, but this has dropped to 31.12% as of April 26. (KOSPI is the country\u2019s primary stock exchange.) Compared to early last year, the total stock of foreign-held publicly traded South Korean equities has fallen<\/a> from around 36-37% to just 31%, a six percentage point drop. The selloff since January has hit a wide range of sectors<\/a>, with Samsung Electronics leading<\/a>.<\/p>\n

Unsurprisingly, the price of equities has fallen considerably since the start of the year, with the KOSPI index being around 10% down. The parts of the market to experience inflows<\/a> of foreign capital, including banking and telecoms, have bucked the broader trend.<\/p>\n

\"\"

Seoul’s nightscape | Image: Pixabay<\/p><\/div>\n

South Korea\u2019s corporate bond market is also seeing problems with the absence of demand<\/a> (especially compared<\/a> to the last two years), forcing firms to pay higher interest rates or issue less debt, which could potentially further stifle<\/a> corporate investment over the course of the year and impact growth.<\/p>\n

This double selloff is by no means a South Korea-only problem and may be driven by the strengthening dollar. But it augers ill for more indebted firms. The rate of indebtedness<\/a> (assets to debt ratio) of the country\u2019s largest firms (with assets in excess of 5 trillion KRW, or around $4 billion) has risen from 67% to 76% since 2019, though the rate of increase declined in 2021.<\/p>\n

Hence, rising interest rates will likely eat into margins and exercise further downward pressure on investment and growth during Yoon\u2019s first year in office, and perhaps throughout the entire administration.<\/p>\n

Edited by Arius Derr<\/em><\/p>\n

Business & Economy<\/span><\/a><\/div>","protected":false},"excerpt":{"rendered":"

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