South Korean economy likely to expand 2.5 pct in 2017, BoK to keep interest rate at 1.25 pct

On 9 May, the polls will be open to vote for a new South Korean president, following the impeachment and removal of former President Park Guen-hye earlier in 2017. According to opinion polls, overwhelming support is seen for front runner Moon Jae, one of the five main presidential candidates. Moon is over his closest rival Ahn Cheol Soo.

If Moon wins the presidential election, as indicated by the poll, it will mark the end of a decade’s worth of governance by the Conservative camp, noted OCBC in a research report. Moon, in his liberal stance has called for proposals to introduce corporate governance reform targeting the chaebols and announced his intentions to inject KRW 10 trillion to underpin job creation and economic growth, and improve relationship with North Korea, stated OCBC.

In the midst of the mix of a rebound of economic backdrop and the rise of geopolitical tensions in the Korean peninsula, market-watchers appeared to regard Moon’s likely victory to be market-positive. The Korea Stock Index (KOSPI) has rallied to its highest since May 2011, while the KRW has strengthened against the US dollar by around 7.9 percent since the beginning of this year.

“Even with the brewing tensions in the North, the overwhelming popularity Moon is commanding should give South Korea the much needed political stability and buoy economic growth should he be elected”, added OCBC.

The Korean economy is gradually rebounding from the weak external environment seen in the last year a well. Significantly, given the nation’s comparatively rosier economic outlook from its positive external environment, official export growth outlook has been upgraded to expand 6 percent to 7 percent to reach USD 525 – USD 530 billion this year.

“In view of these uncertainties, we maintain our GDP growth outlook at 2.5% while keeping our inflation outlook at 2.0% in 2017. Given the record household debt, we also look for policy-makers to keep Korea’s benchmark rate unchanged at 1.25% for the year ahead”, stated OCBC.