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South Korea Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 51 pages

Core Views

Outgoing UN Secretary-General Ban Ki-moon is emerging as the de facto frontrunner for South Korea’s December 2017 presidential election, as the conservative ruling Saenuri and centre-left liberal parties are struggling to find plausible candidates amid severe internal rifts. Meanwhile, President Park Geun-hye’s deteriorating relationship with Saenuri is accelerating her descent to lame duck status, which will impede her ability to pass economic reforms and host the US’s THAAD missile defence system. We are downgrading South Korea’s 2016 real GDP forecast slightly to 2.6% from 2.8% previously despite the economy’s stronger than expected expansion of 3.0% in H116. This is to reflect mounting headwinds from the restructuring of the shipbuilding industry and the spillover effect this will have on the broader economy. In addition, ongoing weakness in the Chinese economy and high levels of youth unemployment will continue to weigh on growth. South Korea’s supplementary budget aimed at supporting growth and ongoing restructuring efforts of the country’s main shipbuilders will be unable to sufficiently mitigate the broader economic slowdown. With downside risks to growth rising, we expect the central bank to cut interest rates to support the government’s initiatives, and now forecast a 25bps cut to 1.00% for its base rate over the coming months. At the same time, we note that the stimulus is unlikely to have an impact on the government’s 2016 headline fiscal deficit, with funding being provided by state-owned institutions. The BoK kept its base rate steady at 1.25% following its August 11 monetary policy meeting, but we retain our forecast for the central bank to cut its base rate by 25bps to 1.00% over the coming months to support government fiscal measures and exports against a backdrop of low inflation. We are revising our average 2016 forecast for the KRW to average KRW1,180/USD from KRW1,200/USD previously to reflect US dollar weakness since late-February, but note that short-term technicals do not bode well for the currency. Over the long-term, South Korea’s strong fundamentals such as a high current account surplus, modest inflation, and relatively robust growth will support the won, allowing gradual appreciation.Major Forecast Changes We have upgraded our 2016 average KRW forecast to KRW1,180/ USD from KRW1,200/USD previously to reflect KRW strength. We have downgraded our 2016 real GDP growth forecast to 2.6% from 2.8% to reflect mounting headwinds. We now expect the BoK to cut its base rate by an additional 25bps to 1.00%, versus our previous forecast for the central bank to hold rates at 1.25%.

Table Of Contents

South Korea Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook ....................................................................................................................................... 8
Downgrading Growth Amid Restructuring Efforts.......................................................................................................................8
We are downgrading South Korea's 2016 real GDP forecast slightly to 2.6% from 2.8% previously despite the economy's stronger-thanexpected
expansion of 3.0% in H116. This is to reflect mounting headwinds from the restructuring of the shipbuilding industry and the
spillover effect this will have on the broader economy. In addition, ongoing weakness in the Chinese economy and high levels of youth
unemployment will continue to weigh on growth.
GDP By Expenditure Outlook.................................................................................................................................. 10
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................10
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................11
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Supplementary Budget To Have Limited Impact On Growth....................................................................................................11
South Korea's proposed supplementary budget aimed at supporting growth and ongoing restructuring efforts of the country's main
shipbuilders will be unable to sufficiently mitigate the broader economic slowdown. With downside risks to growth rising, we expect the
central bank to cut interest rates to support the government's initiatives, and now forecast a 25bps cut to 1.00% for its base rate over
the coming months. At the same time, we note that the stimulus is unlikely to have an impact on the government's 2016 headline fiscal
deficit, with funding being provided by state-owned institutions.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: MAIN SOURCES OF REVENUE and EXPENDITURE..................................................................................................................................13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................13
Monetary Policy........................................................................................................................................................ 13
Further Easing On The Horizon...................................................................................................................................................13
The BoK kept its base rate steady at 1.25% following its August 11 monetary policy meeting, but we retain our forecast for the central
bank to cut its base rate by 25bps to 1.00% over the coming months to support government fiscal measures and exports against a
backdrop of low inflation.
Monetary Policy Framework.................................................................................................................................... 15
TABLE: MONETARY POLICY FORECASTS.......................................................................................................................................................... 15
Currency Forecast.................................................................................................................................................... 16
KRW: Medium-Term Stability Still Likely....................................................................................................................................16
We are revising our average 2016 forecast for the KRW to average KRW1,180/USD from KRW1,200/USD previously to reflect US dollar
weakness since late-February, but note that short-term technicals do not bode well for the currency. Over the long-term, South Korea's
strong fundamentals such as a high current account surplus, modest inflation, and relatively robust growth will support the won, allowing
gradual appreciation.
TABLE: CURRENCY FORECAST...........................................................................................................................................................................16
Outlook On External Position.................................................................................................................................. 17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................17
TABLE: MAIN IMPORTS AND EXPORTS...............................................................................................................................................................18
TABLE: MAIN IMPORT AND EXPORT PARTNERS...............................................................................................................................................18
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................18
Chapter 2: 10-Year Forecast................................................................................................................... 21
The South Korean Economy To 2025..................................................................................................................... 21
Slower Growth To 2025.................................................................................................................................................................21
Internal and external factors will continue to weigh on South Korea's long-term economic outlook, and we forecast real GDP growth to
average 3.3% over the next decade compared to historical averages of 4.3%.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................21
Chapter 3: Political Outlook................................................................................................................... 25
SWOT Analysis......................................................................................................................................................... 25
BMI Political Risk Index........................................................................................................................................... 25
South Korea Domestic Politics............................................................................................................................... 26
Ban Ki-moon Emerging As 2017 Presidential Frontrunner.......................................................................................................26
Outgoing UN Secretary-General Ban Ki-moon is emerging as the de facto frontrunner for South Korea's December 2017 presidential
election, as the conservative ruling Saenuri and centre-left liberal parties are struggling to find plausible candidates amid severe internal
rifts. Meanwhile, President Park Geun-hye's deteriorating relationship with Saenuri is accelerating her descent to lame duck status,
which will impede her ability to pass economic reforms and host the US's THAAD missile defence system.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................26
South Korea Long-Term Political Outlook............................................................................................................. 28
Constitutional Reform To Improve Governance?......................................................................................................................28
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.
North Korea Domestic Politics................................................................................................................................ 30
Civilian Leaders Strengthened, But Hardline Policies To Prevail............................................................................................30
North Korea's latest political reshuffle on June 29 continues the trend of strengthening civilian leaders at the expense of the military.
Even so, Pyongyang is unlikely to weaken its hardline stance on missile and nuclear development.
TABLE: STATE AFFAIRS COMMISSION................................................................................................................................................................30
North Korea Short-Term Political Outlook............................................................................................................. 31
Diplomat's Defection Raises Questions About Elite Loyalty....................................................................................................31
The defection of North Korea's deputy ambassador to the UK underscores the risk to the regime from dissatisfaction among the elites.
Near-term threats to regime stability are limited, but long-term risks are building.
North Korea Long-Term Political Outlook.............................................................................................................. 32
Status Quo Increasingly Unsustainable......................................................................................................................................32
Although North Korea's regime has proved much more durable than many expected, it is becoming increasingly difficult to see how the
country can avoid dramatic change over the course of the next 10 years. The North's opacity means that change - whether it is a palace
coup, regime collapse, or mass uprising - could emerge completely out of the blue.
Chapter 4: Operational Risk................................................................................................................... 37
SWOT Analysis......................................................................................................................................................... 37
Operational Risk Index............................................................................................................................................ 37
Operational Risk....................................................................................................................................................... 38
TABLE: OPERATIONAL RISK.................................................................................................................................................................................38
Market Size And Utilities.......................................................................................................................................... 39
TABLE: ASIA - MARKET SIZE AND UTILITIES RISK............................................................................................................................................40
Labour Costs ........................................................................................................................................................... 42
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE............................................................................................... 43
Chapter 5: BMI Global Macro Outlook................................................................................................... 47
Global Macro Outlook.............................................................................................................................................. 47
EMs Past The Worst, But Structural Problems Persist.............................................................................................................47
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................47
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %..................................................................................................................................48
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %................................................................................................................................. 49
TABLE: MACROECONOMIC DATA and FORECASTS.............................................................................................................................................. 51

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