Population 50.01 million
GDP 1151.271 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
6.3 |
3.6 |
3 |
3.9 |
|
Inflation (yearly average) (%)
|
2.9 |
4 |
2.8 |
3.2 |
|
Budget balance (% GDP)
|
1.4 |
1.5 |
1.6 |
2.4 |
|
Current account balance (% GDP)
|
2.9 |
2.4 |
2 |
1.7 |
|
Public debt (% GDP)
|
31.9 |
32.6 |
31.7 |
29.7 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Diversified industrial base
- Leader in quality electronics
- High-performing educational system
- High public spending on R&D
- Growing South Korean investment in China, Vietnam and India
WEAKNESSES
- Steel and textiles affected by China’s competition
- Scale of raw materials imports
- Over-indebtedness of households and small companies
- Ageing population
- Problems regarding transparency of the chaebols, characterised by family control and hereditary succession
- Unpredictability of North Korea's regime
Risk assessment
Growth expected to recover slightly in 2013
Activity slowed due to the downturn in exports and investment in the wake of the Eurozone crisis in 2012. Growth is expected to pick up again slightly in 2013, with investment likely to post good performances, especially in electronics and automotives due to high use of production capacity and monetary policy easing that started in July 2012. Nonetheless, construction is likely to continue to slow, with SMEs in the sector being especially weak. Private consumption, the main growth driver, will benefit from higher wages, which will buoy retail sales. Households will, however, remain significantly indebted (at 135% of their disposable income). Exports – which represent nearly 50% of GDP – are expected to slow only slightly due to vigorous activity expected in China, South Korea’s main trading partner and the high added value of goods resulted from the huge investments in research and development. Nevertheless, the structure of South Korea’s economy will continue to be a two-speed one, with dynamic industrial conglomerates - the chaebols – co-existing with a low-productivity service sector. Moreover, there are still important issues in terms of corruption and the transparency of the chaebols, characterised by family control and hereditary succession.
Solid financial position
As to public finances, the fiscal surplus is expected to grow in 2013 due to the maintenance of a neutral fiscal policy, which will keep public debt at sustainable levels. However, borrowing by state-owned enterprises needs watching as the aggregated debt of the country’s seven largest companies represents 25% of GDP. But despite this high ratio, the state-owned enterprises still posted satisfactory profitability and capitalisation ratios in 2012. As for the external accounts, the current account surplus narrowed in 2012 due to the recession in the euro zone, weak growth in the U.S. and the slowdown in China. This is likely to narrow only slightly in 2013, as the deceleration of exports to the eurozone will be offset by increased sales to the dynamic emerging countries of Asia, especially China. In this context, foreign exchange reserves will remain at satisfactory levels, making the country able to withstand sudden capital flight.
Portfolio investment flows were highly volatile in 2012, pushing the authorities to strengthen capital controls. Besides macro-prudential regulations aimed at limiting risk-taking by South Korean banks tempted to engage in short-term borrowing on international markets (to invest massively in the won futures market), the authorities have introduced a tax on foreign investments in the local bond market.
The banking sector was affected by deposit runs from twenty mutual savings banks exposed to the construction sector in 2012. The authorities responded by suspending the operations of these banks and protecting deposits. They then created a defeasance structure to restructure the non-performing loans. Moreover, South Korea’s banks are still highly exposed to foreign currency funding. However, the systemic banking risk remains contained, as shown by the satisfactory capitalisation ratio (14%), low levels of non-performing loans and the reduction in the banks’ short-term external debt. However, the quality of loans granted to SMEs, which represent 45% of the banks’ portfolios, needs watching.
Risks of heightened tension with North Korea
After the artillery attack by North Korea on the South Korean island of Yeonpyeong in November 2010, disputes worsened sharply in the Korean peninsula. In addition, Kim Jong-il’s death in December 2011 and the coming to office of his son Kim Jong-un have opened up an uncertain transition period. Against this backdrop, tensions could remain intense in 2013. Resumption of the six-nation negotiations on North Korea’s nuclear programme seems highly unlikely.
Despite gains made by the Democratic Party in the April 2012 legislative elections, the ruling Saenuri Party held on to its parliamentary majority. Meanwhile, the December 2012 presidential elections were won by Park Geun-hye, former president of the Saenuri Party and daughter of the putschist general who seized power in 1961. She will, however, have to contend with internal divisions within the party, especially with conservatives hostile to large-scale reforms. Nonetheless, the continuity and consistency of economic policies should be assured.
