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South Korea Country Risk Report Q1 2016

  • December 2015
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

The passing of South Korea's controversial history textbook lawis unlikely to strengthen the opposition New Politics Alliance forDemocracy (NPAD)'s position in the legislative elections that will beheld in April 2016. While the NPAD has obtained a marginal victoryby opposing the law, the heated debates between the party and theruling Saenuri have demonstrated that both are more concerned withpolitical showmanship, while parliament has yet to pass the budgetfor 2016. This will accordingly weigh on both their performances inthe legislative election that will be held in April 2016.South Korea's Q315 real GDP grew by 2.6% y-o-y, reflecting arecovery from the previous quarter. Despite stronger growth, wehave downgraded our forecast for real GDP growth to come in at2.4% in 2015 compared to 2.8% previously, as the recovery in thedomestic economy will be insufficient to offset the slowdown in theexternal sector. We have also downgraded our real GDP forecastfor 2016 to 2.8% from 3.0% previously, as external demand is likelyto remain weak due to the slowdown in the Chinese economy.The country's expansionary budget reflects the challenges thegovernment faces as it tries to strike a balance between attainingits fiscal goals and supporting growth, and will result in short-termfiscal strain for the government.

In line with our expectations, the Bank of Korea (BoK) held its baserate at 1.50% during its monetary policy meeting on November 12.We forecast interest rates to remain on hold throughout 2015 andhave pared back our rate hike expectations for 2016, forecastingrates to remain on hold instead. Stable inflation, a fragile domesticrecovery, and continued external uncertainty will prompt the BoK tomaintain its monetary stance in a bid to keep borrowing costs lowover the near term.The Korean won will continue to experience depreciatory pressureagainst the US dollar in the near term amid external headwinds.Over the long term, a solid current account surplus and positive realinterest rates will provide support to the won, limiting depreciatorypressures.Major Forecast ChangesWe have downgraded our forecast for 2015 and 2016 real GDPgrowth to come in at 2.4% and 2.8% respectively, compared to 2.8%and 3.0% previously.We have pared back our rate hike expectations for 2016, forecastingrates to remain on hold instead.

Table Of Contents

South Korea Country Risk Report Q1 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Index 7
South Korea Short-Term Political Outlook 8
Textbook Row Unlikely To Impact Legislative Elections Significantly8
The passing of South Korea's controversial history textbook law is unlikely to significantly strengthen the opposition New Politics
Alliance for Democracy (NPAD)'s position in the legislative elections that will be held in April 2016
TABLE: POLITICAL OVERVIEW8
South Korea 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
North Korea Short-Term Political Outlook 12
KWP 2016 Congress To Bring Reform Opportunities12
The North Korean Workers' Party (KWP)'s congress in May 2016 will provide Supreme Leader Kim Jong Un with a further opportunity to
consolidate his power by sideling old officials There is also a strong possibility that he will finally announce new measures to modernise
the economy
TABLE: KOREAN WORKERS' PARTY - MAJOR EVENTS12
North Korea Long-Term Political Outlook 14
Status Quo Increasingly Unsustainable14
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
Chapter 2: Economic Outlook 17
SWOT Analysis 17
BMI Economic Risk Index 17
Economic Growth Outlook 18
Domestic Recovery Insufficient To Offset Trade Slowdown18
South Korea's Q315 real GDP grew by 26% y-o-y, reflecting a recovery from the previous quarter Despite stronger growth, we have
downgraded our forecast for 2015 real GDP growth to come in at 24% compared to 28% previously, as the recovery in the domestic
economy will be insufficient to offset the slowdown in the external sector
TABLE: GDP GROWTH FORECASTS19
TABLE: PRIVATE CONSUMPTION FORECASTS19
TABLE: GOVERNMENT CONSUMPTION FORECASTS19
GDP By Expenditure Outlook 20
Fiscal Policy And Public Debt Outlook 20
2016 Budget: Not Your Typical Election Budget20
South Korea's expansionary budget reflects the challenges the government faces as it tries to strike a balance between attaining its
fiscal goals and supporting growth, and will result in short-term fiscal strain for the government
TABLE: FIXED INVESTMENT FORECASTS20
TABLE: NET EXPORTS FORECASTS20
TABLE: MAIN SOURCES OF REVENUE and EXPENDITURE21
Structural Fiscal Position 22
Monetary Policy 22
Delaying Rate Hike Expectations Until 201722
In line with our expectations, the Bank of Korea (BoK) held its base rate at 150% during its monetary policy meeting on November 12 We forecast interest rates to remain on hold throughout 2015 and have pared back our rate hike expectations for 2016, forecasting rates to remain on hold instead Stable inflation, a fragile domestic recovery, and continued external uncertainty will prompt the BoK to maintain its monetary stance in a bid to keep borrowing costs low over the near term
Monetary Policy Framework23
External Trade And Investment Outlook 24
KRW: Solid Fundamentals To Limit Depreciation24
The Korean won will continue to experience depreciatory pressure against the US dollar in the near term amid external headwinds Over the long term, a solid current account surplus and positive real interest rates will provide support to the won, limiting depreciatory pressures
TABLE: CURRENCY FORECAST24
TABLE: MAIN IMPORTS AND EXPORTS25
TABLE: MAIN IMPORT AND EXPORT PARTNERS25
Outlook On External Position 26
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE26
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE26
Chapter 3: 10-Year Forecast29
The South Korean Economy To 202429
Slower Growth to 202429
Internal and external factors have led us to downgrade our long-term economic outlook for South Korea, forecasting real GDP growth to average 34 % over the next decade compared to 43% previously
TABLE: LONG-TERM MACROECONOMIC FORECASTS29
Chapter 4: Operational Risk33
SWOT Analysis33
Operational Risk Index33
Operational Risk 34
TABLE: OPERATIONAL RISK34
Education35
TABLE: ASIA - EDUCATION RISK36
TABLE: GRADUATES OF TERTIARY EDUCATION BY SUBJECT ('000), 2007-201238
Government Intervention 40
TABLE: ASIA - GOVERNMENT INTERVENTION RISK41
Chapter 5: BMI Global Macro Outlook45
Global Outlook45
Emerging Markets Bending, Not Breaking45
TABLE: GLOBAL ASSUMPTIONS45
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %46
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %46
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %47

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