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South Korea Country Risk Report Q2 2016

  • March 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views Although the US and South Korea are likely to establish a working group to explore the deployment of the Terminal High Altitude Area Defense (THAAD) missile defence system in the latter country, Seoul is likely to postpone the actual introduction of THAAD, owing to Chinese opposition and concerns about a regional arms race. With parliamentary elections due on April 13, conservative South Korean politicians are likely talking up THAAD to bolster their support. South Korea's 2015 real GDP growth came in at 2.6%, slightly higher than our forecast of 2.4%. We maintain our real GDP forecast for 2016 at 2.8% due to our expectations for only a modest pick-up in economic momentum.

High levels of household debt will undermine the government's plans to drive growth through domestic demand, while external demand is likely to remain weak due to the slowdown in the Chinese economy. South Korea's stimulus package, aimed at supporting growth by aiding exports and boosting domestic spending, will have a limited effect on the country's growth, which will continue to be hampered by stiff export headwinds as well as high levels of household debt. With the stimulus mostly coming from policy bank lending, it is unlikely to have a significant impact on the government's 2016 fiscal deficit. However, we expect the central bank to cut interest rates to lend support to the government's initiatives, and now forecast a 25bps cut to 1.25% over the coming months.

The BoK kept its base rate steady at 1.50% following its February 16 monetary policy meeting, but we retain our forecast for the central bank to cut its base rate by 25bps to 1.25% over the coming months to support exports and the government's fiscal stimulus measures. The South Korean won will weaken against the US dollar in the near term due to falling real interest rate expectations amid growing external headwinds and still subdued domestic demand. Accordingly, we have downgraded our 2016 end-year KRW forecast to KRW1,255/ USD from KRW1,200/USD previously. Over the long term, depreciatory pressures will be capped owing to a strong current surplus and large foreign exchange reserves, which reflect the won's slight undervaluation against the USD. Major Forecast Changes We have downgraded our 2016 end year KRW forecast to KRW1,255/ USD from KRW1,200/USD previously to reflect falling real interest rate expectations amid growing external headwinds and still-subdued domestic demand.

Table Of Contents

South Korea Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Maintaining Growth Outlook Amid Export Headwinds8
South Korea's 2015 real GDP growth came in at 26%, slightly higher than our forecast of 24% We maintain our real GDP forecast for
2016 at 28% due to our expectations for only a modest pickup in economic momentum
GDP By Expenditure Outlook 10
TABLE: GDP GROWTH FORECASTS10
TABLE: PRIVATE CONSUMPTION FORECASTS10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS11
Fiscal Policy And Public Debt Outlook 11
Frontloading Of Budget Will Have Limited Impact On Growth11
South Korea's stimulus package, aimed at supporting growth by aiding exports and boosting domestic spending, will have a limited
effect on the country's growth, which will continue to be hampered by stiff export headwinds as well as high levels of household debt
With the stimulus mostly coming from policy bank lending, it is unlikely to have a significant impact on the government's 2016 fiscal
deficit
Structural Fiscal Position 12
TABLE: MAIN SOURCES OF REVENUE and EXPENDITURE12
Monetary Policy 13
Rate Cut Looming13
The BoK kept its base rate steady at 150% following its February 16 monetary policy meeting, but we retain our forecast for the
central b3ank to cut its base rate by 25bps to 125% over the coming months to support exports and the government's fiscal stimulus
measures
Monetary Policy Framework 14
External Trade And Investment Outlook 15
KRW: Further Weakness In Store As Rate Cut Bets Rise15
The South Korean won will weaken against the US dollar in the near term due to falling real interest rate expectations amid growing
external headwinds and still-subdued domestic demand Accordingly, we have downgraded our 2016 end-year KRW forecast to
KRW1,270/USD from KRW1,200/USD previously
TABLE: CURRENCY FORECAST15
Outlook On External Position 17
TABLE: MAIN IMPORTS AND EXPORTS17
TABLE: MAIN IMPORT AND EXPORT PARTNERS17
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE18
Chapter 2: 10-Year Forecast 19
The South Korean Economy To 2025 19
Slower Growth To 202519
Internal and external factors have led us to downgrade our long-term economic outlook for South Korea, forecastin g real GDP growth to
average 34 % over the next decade compared to 43% previously
TABLE: LONG-TERM MACROECONOMIC FORECASTS19
Chapter 3: Political Outlook 23
SWOT Analysis 23
BMI Political Risk Index 23
South Korea Domestic Politics 24
THAAD Feasibility Studies Unlikely To Result In Rapid Deployment24
Although the US and South Korea are likely to establish a working group to explore the deployment of the THAAD missile defence
system in the latter country, Seoul is likely to postpone the actual introduction of THAAD, owing to Chinese opposition and concerns
about a regional arms race With parliamentary elections due on April 13, conservative South Korean politicians are likely talking up
THAAD to bolster their support
TABLE: POLITICAL OVERVIEW24
South Korea Long-Term Political Outlook 25
Constitutional Reform To Improve Governance?25
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 27
A New North-South Korea Crisis In Spring 201627
North and South Korea are heading for a new crisis following the South's shutdown of the jointly run Kaesong Industrial Complex in the
North The biggest risk is an armed clash between the two Koreas as a result of miscalculation
TABLE: MAJOR EVENTS IN THE KIM JONG UN ERA28
North Korea Long-Term Political Outlook 30
Status Quo Increasingly Unsustainable30
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 33
SWOT Analysis 33
Operational Risk Index 33
Operational Risk 34
TABLE: OPERATIONAL RISK34
Trade Procedures And Governance 35
TABLE: EXPORT AND IMPORT DOCUMENTS35
TABLE: TRADE PROCEDURES BREAKDOWN35
TABLE: ASIA - TRADE PROCEDURES AND GOVERNANCE RISK36
Vulnerability To Crime 37
Chapter 5: BMI Global Macro Outlook 41
Global Macro Outlook 41
Tail Risks Mounting Amid Sub-Par Growth41
TABLE: GLOBAL ASSUMPTIONS41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %42
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%) 42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %43
TABLE: MACROECONOMIC DATA and FORECASTS45

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