Strengths (+) and weaknesses ( )

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1 Country Report Sou Korea Country Report Maarten van der Molen Sou Korea s economic momentum has been improving, as on e back of higher consumption and government spending e economy grew by 0.9% quarter on quarter in e ird quarter of Strengs (+) and weaknesses ( ) (+) Well developed and diversified economy Sou Korea s economy is e 14 largest in e World wi a relatively high GDP per capita. It has a strong, diversified and internationally highly competitive industrial and manufacturing base. (+) Strong democratic institutions Underpinned by a mature and stable democratic system, Sou Korea has relatively strong institutions. Especially e rule of law, regulatory quality and government effectiveness are solid. ( ) Relations wi Nor Korea The Korean War ended in 1953 wiout a formal peace treaty and e countries are us still officially at war. As a result of highly erratic and at times aggressive behaviour of Nor Korea, tensions flare up from time to time, while a collapse of Nor Korea could result in very high re unification costs for Sou Korea. ( ) High household debt Korea s households have increased eir borrowing over e past decade. Korea s household debt to GDP ratio has risen from 62.3% in 2008 to 71.5% in 2013, which is similar to e most indebted advanced economies in e world. Key developments 1. Economic momentum improves February 03, /5

2 Sou Korea s economic momentum has been improving, as on e back of higher consumption and government spending e economy grew by 0.9% q o q in e ird quarter of 2014, up from 0.5% qoq in e second quarter. The economic expansion was a result of an increase in consumer spending (1.0% qoq), as consumer confidence picked up in e ird quarter. Consumer confidence dropped in May, as a result of a ferry (Sewol) in April whereby more an 300 people died. Government spending increased by 2.3% qoq, after a stimulus package had been announced in July. The package is wor around USD 44 billion (3.2% of GDP) of which two irds was already spent by e end of Grow was restricted by a negative contribution of e external sector, as exports fell by 2.2% qoq, while imports shrank by 0.2%. Sou Korea s economic outlook also improved. First, consumer spending is expected to increase furer, as borrowing costs have decreased. This relates to e fact at e Bank of Korea lowered its policy interest rate in October for a second time in 2014 to 2%. The positive impact of a lower interest rate is restricted by e already high level of household debt. Second, exports are expected to rise on e back of an improving US economy. For 2014, e Sou Korean economy is expected to have grown by 3.5%, while GDP is expected to expand by 3.7% is year (figure 1). For e longer term, President Park is trying to boost Sou Korea s economic grow potential by a Three Year Plan for Economic Innovation. The plan includes 1) improving e overall regulatory environment and removing red tape 2) reducing e level of debt in public organisations 3) boost domestic demand and 4) increase e labour participation of women and e you. Rising e participation rate is important since Sou Korea will be confronted by ageing (figure 2). Currently 73% of e population is between 15 and 64 years old but is figure will decrease to less an 50% in Finally, e number of SME s at will be labelled as potential (export) champion will be increased from 634 in 2014 to 1150 in Figure 1: Grow performance Korea Figure 2: Korea s ageing population Source: EIU Source: Statistics Korea 2. Political party disbanded In December, e Supreme Court ruled at e United Progressive Party (UPP) had to be disbanded, as e party was violating e basic principles of democracy. Due to e ruling e UPP also has to give up its five seats in parliament. The government had asked e Supreme Court to disband e party, after e party had secretly organised a meeting in May During e meeting e party discussed possible attacks against Sou Korea's utilities in case a war between e two Korea s would break out. The Supreme Court ruled against e UPP wi 8 against 1, while 6 votes were needed to ratify e decision. A lawmaker from e UPP, Lee Seok ki, still awaits for his appeal against a 12 year sentence for organising e meeting. In a comment, Amnesty International expressed its concerns at national security was used to repress e political opposition. 3. Talks or no talks wi Nor Korea Relations wi Nor Korea remain difficult and uncertain. On 8 January, Nor Korea rejected an invitation from Sou Korea s parliament to restart talks about human rights in Nor Korea and re unification of Korean families. This is a setback as Kim Jong un, e Nor Korean leader, surprisingly said in his New Year speech February 03, /5

3 at he was open to a high level summit wi Sou Korea. Anoer offer from Sou Korea to hold talks later in January remained unanswered. In December, Sou Korea was also confronted by cyber attacks on its nuclear plants. President and CEO Cho Seok of Korea Hydro & Nuclear Power Co Ltd said at e plants were still operating safely. Sou Korean prosecutors have started an investigation in cooperation wi e Chinese auorities, as e attacks were linked to a Chinese city close to e Nor Korean border. The Nor Korean auorities however deny at ey were involved in e attack. Tensions between e United States, a Sou Korean ally, and Nor Korea have also been rising after e US accused Nor Korea of cyber attacks on Sony. It is however still unclear wheer Nor Korea is indeed responsible for e attack. Nevereless, e US imposed additional sanctions on Nor Korea following e Sony cyber attack. Factsheet of Sou Korea Source: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Wiout Borders, World Bank. Background information Sou Korea is a high income country wi a strong industrial base. Sou Korea is e 14 largest economy in e world and a member of e G20 and e OECD. After Sou Korea adopted an outward looking strategy in e second half of e 20 century, in which grow and development were supported by labour intensive manufactured exports, e country industrialised rapidly. The industrial sector still remains e backbone of e Sou Korean economy. From e 1990s onwards, Sou Korea s manufacturing sector expanded into oer, more high tech areas such as microelectronics and microbiology. The importance of e export sector to e Sou Korean economy does, however, increase e country s vulnerability to external developments. As a result of continued focus on business friendly policies, e country is ranked 7 out of 183 countries on e ease of doing business index. February 03, /5

4 A constitutional change in 1987 laid e foundation for e current stable multi party democracy. Sou Korea s political and business environment is dominated by close personal relationships and a strong influence of chaebols (large business conglomerates). The downside of is is economic nationalism and corruption. Since fighting between Nor and Sou Korea ceased in 1953 wiout a formal peace treaty, e tense and uneasy relationship between e two nations remains an important downside risk. Tensions flare up from time to time, usually due to provocations initiated by e Nor Korean regime. Economic indicators of Sou Korea Source: EIU Auor(s) Maarten van der Molen International Research (IR) M.T.Molen@rn.rabobank.nl February 03, /5

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