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Korea’s ‘Tiger’ growth slows – but for how long? REAL GDP, 2000-2017


The South Korean economy survived the global downturn largely unscathed but is now facing new challenges. However its fundamentals remain strong, said Focus Economics.


outh Korea, one of the so-called Asian Tigers, is a high-income economy with a well-developed financial market. It is the third largest economy in Asia outside Japan, following China and India, representing 8 percent of the region’s gross domestic product in 2012. It is also one of the fastest growing countries among the newly industrialised economies (NIEs), which also include Hong Kong, Taiwan and Singapore. The country is relatively small in terms of population, compared with much larger neighbouring economies such as China, India and Indonesia. Nonetheless, it boasts an open economy that relies heavily on exports (equivalent to almost 60 percent of the country’s GDP) and is ranked as the seventh top exporter in the world. On a negative note, due to its scarcity of natural resources, South Korea is also among the countries most dependent on energy imports. The country was among the few developed nations to avoid a recession during the global financial crisis, as Korean GDP expanded by 0.3 percent year on year in 2009. In addition, the economy experienced a strong rebound in 2010 (+6.3 percent) and sustained growth in 2011 (+3.7 percent). However, the weakness of the global economy has hit Korean growth more recently and the economy slowed to a 2 percent expansion in 2012. In 2012, merchandise


S


exports reached USD548 billion while imports amounted to


22 July/August 2013 EXPORTS, 2000-2017 IMPORTS, 2000-2017


Source: Bank of Korea (BoK) and FocusEconomics Consensus Forecast.


USD520 billion, resulting in a trade surplus of USD28 billion. South Korea has run trade surpluses since 1998, with the only exception being 2008. That said, in the wake of the financial crisis, the trade balance has remained on a downward trend. Against this backdrop, FocusEconomics panellists expect the trade surplus to hit USD30 billion this year. In the aftermath of the


Korean War, South Korea emerged as one of the poorest countries in the world. Supported by foreign aid and targeted government initiatives, the country transformed its economy, following an export-led growth strategy that has persisted to this day.


Industries


Between the 1970s and 1980s, Korea’s main industries were predominantly labour-intensive – with textiles being the most relevant. However, from the 1980s, the country shifted to other sectors such as chemicals, steel and petroleum refining. Today, the Korean economy is focused on more technology-intensive sectors such as shipbuilding, automobiles and electronics, although other sectors still play an important role. In 2012, South Korea’s main exports comprised petroleum products, which accounted for 10 percent of


total exports, together with semiconductors, general machinery and automobiles (9 percent), petrochemicals (8 percent), and ships and steel (7 percent).


Imports


The country’s main imports are raw materials and fuel, in particular oil (21 percent of total imports), of which the country is among the top importers in the world (ranked seventh in 2011). Other imports include capital goods, in particular electrical products and machinery (14.7 percent), as well as chemicals (8.4 percent). China and Association of South East Asian Nations (ASEAN) economies remain the biggest market for South Korean exports, although the USA and the EU follow suit. Despite the slowdown in 2012, the country still has strong fundamentals. South Korea’s public finances are solid, with public debt reaching a moderate 33.7 percent of GDP in 2012. In addition, Korea has kept a fiscal surplus since 2000, with the sole exception of 2009. With regards to monetary policy, the Central Bank recently cut the policy rate to 2.5 percent after keeping it unchanged at 2.75 percent for seven months in a row. The decision sparked concerns over the bank’s independence, as monetary authorities appear to have yielded to government


pressures for an interest rate cut. However, the country is


currently facing a few significant challenges. First, political tensions with North Korea are resurfacing, as the latter recently resumed missile test launches and threats against South Korea and the USA. Secondly, the continued depreciation of the Japanese yen – caused by the stimulus programme of Japanese prime minister Shinzo Abe, flanked by aggressive monetary easing by the Bank of Japan – poses a risk to the competitiveness of Korean export industries. In this regard, the South Korean won (KRW) has been gradually appreciating since September 2012 – when elections in Japan were announced. Against this backdrop the


FocusEconomics Consensus Forecast sees the economy growing by 2.6 percent in 2013, which is down 0.1 percentage points from last month’s forecast. For 2014, the panel sees the economy growing by 3.7 percent.


HLPFI


 The FocusEconomics Consensus Forecast is a monthly forecast based on the analysis of a number of Korean panellists, individual projections from investment banks, consultancies and think tanks. For more information, consult the FocusEconomics website.  South Korea feature, pages 123-127.


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