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South Korea's economic woes will bedevil its next president

Friday, March 10, 2017 - 12:09

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South Korean President Park Geun-hye's successor will inherit a struggling economy that faces heightened risks from China and the US, its biggest trading partners, as well as record household debt.

[SEOUL] South Korean President Park Geun-hye's successor will inherit a struggling economy that faces heightened risks from China and the US, its biggest trading partners, as well as record household debt.

The constitutional court upheld Park's impeachment on Friday. A special election will be held within two months to choose her replacement."Creating more jobs, especially for the youth, would be a priority among domestic issues, and more jobs would help ease the household debt problem as well," said Kim Jung-sik, a professor of economics at Yonsei University in Seoul. "Responding to trade protectionism, and finding new growth engines as Chinese companies increasingly catch up with Korean firms are also important tasks for the next leader." Moon Jae-in, a former leader of the main opposition Democratic Party, is the front-runner in the presidential race, with support of 34 per cent, according to Gallup Korea's latest poll. Fellow party member Ahn Hee-jung, governor of South Chungcheong province, ranked second in the poll with 15 per cent. 

Here is a look at some of the biggest economic challenges facing South Korea: US, China China's retaliation over a US-led missile defense system and protectionist policies from President Donald Trump's administration top the list of imminent threats to growth for South Korea, which generates about half of its gross domestic product from exports.  The Bank of Korea sees the economy expanding 2.5 per cent this year, the slowest pace since 2012. But growth could slow further.

Daiwa Capital Markets on Wednesday cut its forecast for Korea's economy to 1.75 per cent from 2.3 per cent, noting rising tensions with China. The US and China together account for almost 40 per cent of Korea's exports.  China may be more willing to talk with Mr Moon, who has said the decision on the missile defense should be made by the next government after public discussion. Mr Moon has criticized China's recent actions against Korean companies.  The next leader will also need to engage in talks with the Trump administration over South Korea's trade surplus with the US, including a possible renegotiation of the Korea-US trade agreement. 

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Korea's millennials refer to their country as "hell," and the main reason is an unemployment rate that is twice has high for people under 30 as it is for the whole nation. Meanwhile, many elderly need jobs because they can't make ends meet after retirement due to a weak pension system.

Presidential candidates have proposed some remedies. Opposition candidate Lee Jae-myung, for example, pledged to offer 1 million won (S$1,227) in vouchers a year to all Koreans between the ages of 19 and 29. Mr Moon has pledged to create about 800,000 jobs in the public sector. But there has been little discussion about how to encourage private companies to hire more workers.

  The scandal that ensnared Ms Park also led to the arrest of a Samsung Group heir, casting a spotlight on inappropriate ties between Korea's businesses and political leaders. This has strengthened the opposition's call for stronger measures against the chaebol, the nation's dominant family-run conglomerates. Efforts to improve Korea's corporate governance have mostly failed in the past, but greater public outrage may be the difference this time. Mr Ahn, the provincial governor, has said chaebol reform is about eliminating unfair business practices, and has pledged to ban cross-shareholding and revamp regulations.  Meanwhile, Korean companies in once-powerful industries such as shipbuilding must continue with their restructuring. This has led to widespread job losses, putting the onus on the government to provide a social safety net for those who are dismissed.

Ms Park's administration has implemented a series of measures to curb household debt, which hit a record 1,344.3 trillion won and continues to rise rapidly. The Federal Reserve's anticipated interest rate hikes could worsen the problem, raising the debt repayment burden on many by pushing up yields in Korea. This could lead to bankruptcies that further strain the economy. And a property market that has reached elevated levels would also be at risk of a downturn if credit is tightened.

The usual tool of cutting the benchmark interest rate to support growth may not be available in the near term because of rising rates in the US. With yields on Korean government bonds already lower than those for U.S. bonds of longer-term maturities, further rate cuts in Korea would risk unwelcome capital outflows as the Fed raises rates. This means Korea would have to rely more on fiscal spending to stimulate growth. Mr Moon has said he would quickly push for a supplementary budget to create more jobs if he is elected.

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