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Republic of Korea: New Fiscal and Monetary Support to Stimulate Economy

Highlights
CapitalSeoul
Population51.2 million
CurrencySouth Korean Won
Official languageKorean
Form of governmentPresidential republic

 

Major Merchandise Exports (% of total, 2016) Major Merchandise Imports (% of total, 2016)
Machinery & transport equipment (58.8%)Machinery & transport equipment (35.1%)
Manufactured goods (13.1%)Mineral fuels, lubricants & related materials (20.2%)
Chemicals & related products (12.0%)Manufactured goods (11.7%)
Top Three Export Markets (% of total, 2016)Top Three Import Markets (% of total, 2016)
China (25.1%)China (21.4%)
USA (13.5%)Japan (11.7%)
Hong Kong (6.6%)USA (10.7%)

Source: Economist Intelligence Unit

Political Highlights

Following the impeachment of President Park Geun-hye, Moon Jae-in from the liberal Democratic Party was elected president in May 2017. He pledged to reform the powerful family-run conglomerates of the Republic of Korea (often referred to as South Korea), known as chaebols, which make up the bulk of GDP and are influential over domestic politics, and to investigate corruption by high-ranking public officials, and raise minimum wage and create more public sector jobs.

However, Democratic Party’s lack of the majority of seats in a parliamentary may impede policy implementation in a divided National Assembly. Therefore, cooperation with the opposition on divisive issues is essential, and Moon may need to first tackle issues with some common ground among political parties and the public.

Internationally, South Korea is on the front line of any North Korean attack and eager to maintain security ties with the US, but it, on the other hand, attempts to deploy a US missile defense system (THAAD) has strained relations with China, its major trading partner. Moon has so far taken a softer stance toward North Korea than his predecessor.

Economic Trend

Economic Indicators2015
2016
2017
2018^
2019^
Nominal GDP (USD bn)1,3831,4111,526*1,7201,847
Real GDP growth (%)2.82.83.1*2.82.9
GDP per capita (USD)27,34027,77029,930*33,61035,980
Inflation (%)0.71.01.91.81.7
Budget balance (% of GDP)0.01.01.0*0.70.6
Current account balance (% of GDP)7.77.05.1*5.46.2
Government debt (% of GDP)45.745.543.6*41.339.7
External debt (% of GDP)27.225.424.7*21.519.4

* Estimates    ^ Forecasts
Source: Economist Intelligence Unit

South Korea is an export-oriented economy. It is heavily dependent on imports of raw materials and exports of goods such as cars and phones. Economic growth has been sluggish since 2012 due to subdued global trade, and the authorities have responded with fiscal and monetary support. A stimulus package of US$ 9.6 billion has been launched to create public sector jobs and the Bank of Korea keeps the interest rate at record low of 1.25%.

While loose monetary policy has supported economic growth in recent years, mounting household debt has become a side-effect. At the end of 2016, household debt rose to 1,344.3 trillion won, equivalent to over 90% of GDP which is seen as a major risk to the country’s financial system and has exerted a drag on private consumption. The authorities announced more stringent bank screening of loan applications to contain such risk.

South Korea attempts to bolster its trading position by signing free-trade agreements (FTAs) with the European Union in 2011 and the US in 2012, as well as with China in 2015. However, China’s slowing growth and moving up the value chain might negatively affect South Korea’s exports, and the protectionism around the world and a possible revision of the South Korea-US free trade agreement would bring uncertainties to the economy. In long term, a rebalancing to make the economy less dependent on volatile external demand would increase South Korea’s resilience.

Chart: Hong Kong total exports to Republic of Korea
Chart: Hong Kong total exports to Republic of Korea

Hong Kong-Republic of Korea Trade

Total exports from Hong Kong to the Republic of Korea increased by 4.9% from HK$54,040 million in 2016 to HK$56,672 million in 2017. The top three export categories to the Republic of Korea were: (1) electrical machinery, apparatus & appliances, & parts (-3.9%), (2) telecommunications, audio & video equipment (+16.2%), and (3) office machines & computers (+51.6%), which represented 70.9% of total exports to the Republic of Korea.

HKECIC Underwriting Experience

HKECIC imposes no restrictions on covering buyers in the Republic of Korea. Currently, the insured buyers in the Republic of Korea range from small and medium sized companies to listed companies. The Corporation’s underwriting experience on the Republic of Korea has been satisfactory, with three payment difficulty cases and two claim cases from March 2017 to February 2018, involving mineral products, jewellery and clothing.

Content provided by Picture: Hong Kong Export Credit Insurance Corporation
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