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Eco Emerging

South Korea: Limited potential credit risks

04/14/2023 • By Hélène DROUOT

Korean economic growth lagged behind in Q4 2022, and the slowdown is expected to continue in 2023. Exports will suffer from slowing global demand, while domestic demand will be penalised by rising interest rates and persistent inflation. The risks of financial instability remain limited, but have increased in recent months. Household debt is high at almost 110% of GDP, and households are very exposed to rising interest rates. In fact, 76% of loans to households are being taken out at a variable rate. Potential credit risks though remain limited to the most vulnerable households.

Eco Emerging

Positive overall
07/08/2022 • By Hélène DROUOT

Korea’s solid macroeconomic fundamentals have made it one of the countries that has best withstood the COVID-19 pandemic. Economic growth prospects remain relatively positive. The new government, in office since May, spelled out its intention to continue the reforms begun during the previous administration, and, in particular, aims to increase research and development expenditure. Household debt rose rapidly in 2021 and is high, but the macro-prudential measures put in place by the authorities seem to be bearing fruit: the rise in debt has slowed and financial stability risks are contained.

Eco Emerging

A complex economy
10/12/2021 • By Hélène DROUOT

The third wave of the Covid-19 pandemic is unlikely to jeopardise the dynamic momentum of South Korea’s economic recovery. Solid fundamentals, diversified exports and massive fiscal and monetary support should help limit the impact of the crisis on the country’s medium and long term growth prospects. In contrast, an ageing population continues to erode the country’s growth potential and public finances, even though the government has implemented a series of structural reforms. Household debt has picked up rapidly over the past 18 months. The associated credit risks are limited, however, thanks to the implementation of macroprudential measures and the comfortable level of household financial assets.

Charts of the Week

South Korea: beginning of a new wave
11/24/2020 • By Hélène DROUOT

New cases of Covid-19 have been rising again in Korea, with more than 300 cases per day on average since mid-November (349 on Nov 24). The number of new infections had remained stable (under 100 new cases per day) since mid-September. The government reinforced social distancing measures twice (on Nov 19 and 24), raising the level of alert to 2 (on a scale of 5) in the Seoul area, the main seat of recent infections. Provided it remains contained, this beginning of a new wave should not call into question the gradual recovery initiated in Q3 (+1.9% q/q, after -3.2% in Q2). The social distancing measures will weigh on domestic demand in the last quarter of 2020, but the effect should remain limited, as observed in August-September (when the level of pandemic alert was also raised to 2)

Eco Emerging

Resilient
10/05/2020 • By Hélène DROUOT

Once again, South Korea seems to be withstanding the crisis better than developed nations generally. The effective management of the health crisis and the government’s massive stimulus package paved the way to a shallower recession than in other countries in the first half of 2020. However, the new social distancing measures introduced at the end of August and the persistent weakness of exports will hold back growth over the coming months. In the short to medium term, macroeconomic fundamentals are likely to remain very solid: government deficit and debt levels remain modest, inflation is under control and external vulnerability is very low.

South Korea has the fourth largest nominal GDP in Asia. Economic growth slowed down because of weaker world demand growth, internal shocks and structural factors (such as low labour productivity of SMEs vs. large corporates, high private-sector debt, rapid population ageing and a distorted labour market).

Yet the economy enjoys broad diversification and a high level of competitiveness, and more than ten years of prompt and effective policy response to global shocks have helped to build strong fundamentals.

The pandemic affected Korea through several channels, of which supply chain linkages, tourism and investment, but the effective management of the COVID-19 crisis and significant support measures have led to a less severe crisis than in most developed countries. The recovery is expected to be robust, supported by high global demand for Korean’s manufactured exports, while domestic demand’s recovery is expected to be delayed, as new contamination and mobility restrictions persist.

Household debt is the main risk in the financial system, though not in the short term, and macroprudential policies are effectively addressing financial-stability challenges so far. In the medium term, real GDP growth is expected to slow. However the economy’s diversity and competitiveness, as well as a relatively strong productivity growth and investment (supported by the government’s “Fourth Industrial Revolution” and the “Korean New Deal” plans, unveiled in 2020), will help mitigate these pressures.