Political Uncertainty Weighs on South Korean Economy

The economic growth of South Korea remained decent for the first three quarters of this year, while trade growth stayed weak. The growth remained decent at 2.9 percent for the initial three quarters, as compared with 2.6 percent in 2015. This was partially due to swift actions by the government and the central bank to offset the economic slowdown.

The Bank of Korea, in June, maintained monetary conditions accommodative by cutting its policy rate by 25 basis points to an all-time low of 1.25 percent. The Finance Ministry, in July, then initiated a supplementary budget of KRW 11 trillion to ease the risks from corporate restructurings, noted Commerzbank.

“South Korea’s growth will likely print at 2.9 percent in 2017, largely unchanged from this year”, added Commerzbank.

This highlights the resilience of the economy, particularly when compared with regional peers such as Singapore, Hong Kong and Taiwan where growth has slowed to 1 percent to 2 percent. The Bank of Korea is expected to remain on hold at an all-time low of 1.25 percent in the near future. In June, the central bank surprised the market with a 25 basis points. Currently, there is no urgent requirement to lower rates given the need to curb depreciation pressure on the Korean won.

The consumer price index is expected to slightly rebound next year, mainly because of base effects. The CPI inflation is likely to accelerate to 1.6 percent next year from 1 percent this year, according to Commerzbank. As inflation remains quite below the 2 percent target, the Bank of Korea still has enough room to ease monetary policy if required.

Political uncertainty would be the main risk to look out for. The presidency of Park has been hit by allegations that a close friend used her ties to the leader to meddle in state affairs and wield improper influence.

Today, the impeachment vote started. The Parliament of South Korea voted to impeach President Park Geun-hye.

Meanwhile, with the U.S. Fed likely to hike rates a couple times in the years ahead, there appears to be some upside risks for USD/KRW pair.

“We target USD-KRW at 1200 by year-end of 2017 and 1260 by the end of 2018”, said Commerzbank.

At 08:30 GMT, the USD/KRW pair is trading at 1166.8.