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South Korea Business Forecast Report Q4 2014

  • September 2014
  • -
  • Business Monitor International
  • -
  • 46 pages

Core Views
Inter-Korean ties will remain cool in the near future given the mismatch in expectations, and the failure to adequately communicate intentions and limitations between the North and South. T he Korean economy grew at a slower rate in Q214 due to a contraction in domestic consumption. While we expect the fiscal stimulus and accommodative monetary policy to provide a temporary boost to growth, these measures will not take effect until Q414. We therefore maintain our real GDP growth forecast at 3.5% for 2014, and expect it to be marginally stronger in 2015 at 4.1%.

We believe that the proposed revisions to Korea's tax code recently announced by the Ministry of Finance will lead to a temporary increase in domestic demand in 2015. However, we do not expect this increase to be sustainable as wage growth is likely to remain weak, and note that loopholes in the proposed revisions could instead lead
to increased investment overseas. T he Bank of Korea (BoK) cut the base rate by 25 basis points (bps) at its rate meeting in August, bringing the current interest rate down
to 2.25% from 2.50%. We believe that upside and downside forces on rates are evenly balanced, and expect rates to remain on hold through 2015.

W e expect the Korean won to trade between KRW1,000/USD and KRW1,050USD over the remainder of 2014, ending the year at KRW1,000/USD. We further expect the won to end 2015 at KRW1,000/USD. We remain neutral on the currency in the short term, but maintain that an acute slowdown in China presents a downside risk to our view as South Korea is highly dependent on exports to China.

Table Of Contents

South Korea Business Forecast Report Q4 2014
Executive Summary. 5
Core Views..5
Key Risks To Outlook5
Chapter 1: Political Outlook. 7
SWOT Analysis.. 7
BMI Political Risk Ratings 7
Domestic Politics . 8
Inter-Korean Stalemate To Continue8
Inter-Korean ties will remain cool in the near future given the mismatch in expectations, and the failure to adequately communicate
intentions and limitations between the North and South.
Table: Political Overview..8
Long-Term Political Outlook.. 10
Constitutional Reform To Improve Governance?.10
South Korea is likely to see a renewed push for constitutional change in order to address imbalances in the political system that lead to
periodic instability. In addition, owing to the single-term restriction on the presidency, most presidents typically become 'lame ducks' well
before departing office, leaving the country in a state of drift.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings... 13
Economic Activity... 14
Weak Domestic Consumption Hinders Growth.14
The Korean economy grew at a slower rate in Q214 due to a contraction in domestic consumption. While we expect the fiscal stimulus
and accommodative monetary policy to provide a temporary boost to growth, these measures will not take effect until Q414. We
therefore maintain our real GDP growth forecast at 3.5% for 2014, and forecast it to be marginally stronger in 2015 at 4.1%.
Table: Economic Activity..14
Fiscal Policy 15
Proposed Tax Revisions To Temporarily Boost Consumption15
We believe that the proposed revisions to Korea's tax code recently announced by the Ministry of Finance will lead to a temporary
increase in domestic demand in 2015. However, we do not expect this increase to be sustainable as wage growth is likely to remain
weak, and note that loopholes in the proposed revisions could instead lead to increased investment overseas.
Table: Fiscal Policy16
Monetary Policy .. 17
Rate Target Hit, Long Hold Ahead..17
The Bank of Korea cut the base rate by 25 basis points at its rate meeting in August, bringing the current interest rate down to
2.25% from 2.50%. We believe that upside and downside forces on rates are evenly balanced, and expect rates to remain on hold
through 2015.
Table: Monetary Policy17
Exchange Rate Policy 18
KRW: Gradual Appreciation Ahead18
We expect the Korean won to trade between KRW1,000/USD and KRW1 ,050USD over the remainder of 2014, ending the year at
KRW1,000/USD. We further expect the won to end 2015 at KRW1,000/USD. We remain neutral on the currency in the short term,
but maintain that an acute slowdown in China presents a downsid e risk to our view as South Korea is highly dependent on export s
to China.
Table: CURENCY FORECAST..18
Table: Current Account...19
Chapter 3: 10-Year Forecast... 21
The South Korean Economy To 2023. 21
Robust Growth To 2023...21
We are expecting annual real GDP growth in South Korea to decel erate marginally from an average of 4.4% between 2001
and 2008 to around 4.4% over 2014-2023. While we see many of So uth Korea's traditional exports meeting fierce competition
in the coming years from emerging Asia, we believe that underly ing conditions within the country are conducive to a move up
the production value chain, ensuring a robust economic growth p rofile. Furthermore, we see private consumption being a key
contributor to growth over this forecast period.
Table: Long-Term Macroeconomic Forecasts21
Chapter 4: Business Environment. 25
SWOT Analysis 25
BMI Business Environment Risk Ratings.. 25
Business Environment Outlook. 26
Institutions... 26
Table: BMI Business And Operation Risk Ratings26
Table: BMI Legal Framework Rating.27
Table: Labour Force Quality..28
Infrastructure... 29
TABLE: ASIA - ANUAL FDI INFLOWS29
Table: Trade And Investment Ratings.30
Market Orientation... 31
Table: Top Export Destinations (USDmn)32
Operational Risk.. 33
Chapter 5: Key Sectors.. 35
Telecommunications... 35
South Korea is one of the most advanced markets in the world and is the first nation to have launched LTE-advanced services
commercially. Only SK Telecom is still offering 2G services in the market and we expect 2G to be completely phased out by 2015. The
key mobile growth driver is expected to be the migration of customers from 3G to 4G, although we see some downside risk to the pace
of this transition after the handset distribution law takes effect from October 2014.
Table: Telecoms Sector - Mobile - Historical Data and Forecasts 35
Table: Telecoms Sector - Wireline - Historical Data and Forecasts 36
Shipping... 37
Table: Major Port Data.40
Other Key Sectors... 43
Table: Oil and Gas Sector Key Indicators.43
Table: Pharma Sector Key Indicators43
Table: Defence and Security Sector Key Indicators...43
Table: Infrastructure Sector Key Indicators...44
Table: Food and Drink Sector Key Indicators.44
Table: Autos Sector Key Indicators...44
Table: Freight Key Indicators44
Chapter 6: BMI Global Assumptions. 45
Global Outlook. 45
Eurozone Downgrade On Poor Q214..45
Table: Global Assumptions.45
Table: Developed States, Real GDP GrowtH, %...46
Table: BMI VERSUS BLOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %. 46
Table: Emerging Markets, Real GDP Growth, %..47

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