Emerging

Double whammy

th  
13  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
South Korea  
Double whammy  
Korea’s economic growth prospects have continued to deteriorate. Recent trade tensions with Japan have come on top of the  
slowdown of the Chinese economy and in global demand as well as the conflict between the United States and China, hitting  
exports and investment. The authorities have some scope to stimulate domestic demand. As has been the case for several years  
now, fiscal policy will remain expansionary in 2020, whilst the central bank could cut its policy rate in the short term. Stimulus  
measures will nevertheless not be enough to boost economic growth significantly in 2020.  
A further slowing of growth  
1-Forecasts  
Having grown by 2.7% in 2018, real GDP growth slowed  
significantly in the first half of 2019 (1.9% y/y). Non-construction  
investment fell by an average of 6.5% over the first two quarters of  
2017  
2018 2019e 2020e  
Real GDP growth (%)  
3.2  
2.7  
1.9  
2.1  
Inflation, CPI, year average (%)  
Gen. gov. balance / GDP (%)  
Gen. gov. debt / GDP (%)  
1.9  
1.4  
1.5  
1.4  
0.9  
0.3  
1.5  
2019 and spending on capital goods fell by more than 17% over the  
-1.6  
same period, a direct consequence of the difficulties experienced in  
the semiconductor sector and the trade war between China and the  
United States. In addition, the macro-prudential rules introduced by  
the government at the end of 2017 (intended notably to control the  
growth in household debt) have held back investment in  
construction. In total, investment fell for the fifth consecutive quarter,  
dropping by 3.4% (y/y) in Q2 (Chart 2). At the same time, private  
consumption stabilised at 1.0% in the first half of 2019, having  
slowed throughout 2018. All the available figures for the third  
quarter (retail sales, industrial production and the PMI) suggest a  
further slowing in the third quarter.  
40.4  
5.1  
39.5  
4.8  
37.1  
4.3  
39.8  
4.1  
Current account balance / GDP (%)  
External debt / GDP (%)  
27.7  
384  
28.3  
404  
28.6  
405  
28.6  
405  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDKWR (year end)  
7.9  
7.3  
7.5  
7.5  
1 130  
1 122  
1 200  
1 100  
e: BNP Paribas Group Economic Research estimates and forecasts  
2
- Investment  
Investment, % y/y, and contributions in pp  
Construction Facilities Intellectual Property Products  
Most importantly, exports collapsed, dropping 11.7% y/y in  
September, after a 13.8% fall in August. Over the last nine months  
of the year they fell by nearly 10% y/y, having grown by 6% in 2018.  
Exports to China fell particularly sharply, reflecting both the  
weakness of global demand  China remains at the centre of the  
Asian value chain even though its structure is changing  and the  
slowing of the Chinese economy, which is becoming an increasingly  
important source of final demand. The worst affected sectors were  
exports of semiconductors and electronic goods, which saw heavy  
falls. Nor are prospects particularly favourable: Chinese growth is  
likely to slow further, and trade tensions between China and the  
United States persist. In addition, the Korean export sector will be  
further put to the test over the coming quarters: since the beginning  
of the summer, the diplomatic conflict between Japan and Korea  
has heated up, leading to restrictive trade measures between the  
two countries.  
Total investment  
15  
1
0
5
0
5
-
-
10  
15  
-
2014  
2015  
2016  
2017  
2018  
2019  
Source: National Accounts  
Tensions with Japan  
On 1 July 2019, the Japanese Prime Minister announced  
restrictions on the export to Korea of a range of products, including  
three chemical products that are required for the production of  
semiconductors, smartphone screens and TVs, which are key  
industries in Korea. Then on 2 August, the Japanese government  
announced that Korea had been removed from the list of countries  
with which Japan has favoured trade relations. The countries on this  
list are considered as “reliable” trade partners and, amongst other  
things, enjoy facilities relating to the import of strategic products  
(military material, sensitive chemical products). Conversely,  
The tensions between Korea and Japan flow from an historical and  
political conflict that has rumbled on for many decades . Recently,  
the re-emergence of disagreements relating to colonial reparations  
have revived tensions between the two countries.  
1
1
Korea was colonized by Japan between 1910 and 1945. In 1965, after 14  
years and 7 cycles of negotiation, the two countries signed a treaty normalizing  
their relationship, particularly on the economic front. Since then, the relationship  
between the two countries has nevertheless been strained.  
th  
14  
EcoEmerging// 4 quarter 2019  
economic-research.bnpparibas.com  
countries not on the list must request special authorisation for each  
product every 6 months, and the delay in this authorisation being  
granted can be up to 90 days. Korea will have to seek  
authorisations for more than 1,000 products, and the Japanese  
government could expand the list of products requiring special  
authorisation at any time.  
3
- Exports  
Exports, y/y %, 3mma  
 Semiconductors  Other sectors  
30  
25  
2
1
1
0
5
0
5
0
In mid-September, the Korean government took a similar decision,  
removing Japan from the list of friendlytrading partners. This  
decision comes a month after Korea decided not to renew an  
agreement on the sharing of military intelligence that had existed  
since 2016.  
-5  
10  
15  
20  
-
-
-
Repercussions for the export sector  
At first sight, the consequences for the Korean economy are likely to  
be relatively limited: imports from Japan were less than 10% of the  
total in 2018 (with those from the United States and China  
representing 12% and 21% respectively), whilst exports to Japan  
account for 5% of the total (with 25% going to China and 12% to the  
US). In addition, in terms of value added, the move up market of  
Korean industry over the past decade has translated into a marked  
reduction in the share of Japanese inputs into the Korean  
production process.  
2
016  
2017  
2018  
2019  
Source: Ministry of Trade, Energy and Industry  
(semiconductors, biochemicals & healthcare and innovative  
vehicles) will receive additional support. In addition, research and  
development spending is likely to rise by nearly 20%, and spending  
relating to the manufacturing sector and SMEs set to increase by  
nearly 30% compared to 2019. Fiscal policy has been expansionary  
for several years now. According to government forecasts, if we  
take account of the social security surplus, the public finances are  
likely to be in deficit in 2020 (at 1.6% of GDP, compared to a surplus  
of 0.3% of 2019) for the first time since 2015. Without the social  
security surplus, the deficit would be 3.6% of GDP (from 2.0% in  
This said, in 2018, 90% of imports from Japan were intermediate  
goods and capital goods. The vast majority of these imports  
consisted of chemical products, which represent intermediate goods  
for the semiconductor and base metals sectors and are precisely  
the products targeted by restrictions. Lastly, the Japanese  
companies supplying all these goods have dominant positions in the  
global market, making alternative supplies difficult to access for  
Korean companies.  
2
019).  
All in all, given the frankly negative prospects for the export sector,  
stimulus measures are unlikely to be enough to offset the slowdown  
in growth in 2019 and 2020. Real GDP growth is unlikely to be  
significantly above 2.0% in 2019 and 2020.  
According to the Korean Ministry of Trade, at the beginning of  
October, that is to say three months after the measures were  
announced, authorisation requests for numerous products used in  
the semiconductor production chain had not been successful. The  
semiconductor sector in particular (but potentially a much broader  
segment of Korean industry) could find itself structurally weakened if  
delays in supply (or shortages in a more extreme scenario)  
persisted. More generally, given the high level of integration of the  
various economies in the region, the whole of the Asian value chain  
could be hit by delays in supply. Lastly, investor concern could  
mount, further holding back investment over the coming quarters.  
Sources of support for investment  
South Korea has solid macroeconomic fundamentals and the scope  
to support the economy. Falling inflation gives the central bank the  
option of cutting interest rates (currently at 1.25%) over the next few  
quarters.  
Most notably, public debt is modest, at around 40% of GDP. When it  
presented its budget for 2020, the Korean government included a  
range of measures intended to support growth, particularly in  
investment. Under its ‘growth through innovation’ programme, the  
government plans to reduce dependence on imports, increase local  
competitiveness and accelerate Korean industry’s move up the  
value chain. The three industries targeted by the programme  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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