South Korea

Politics:

• Analysis

  South Korea politics: Quick View - First female president is elected

  Event

  As most opinion polls predicted, Park Geun-hye of the ruling, conservative Saenuri Party defeated Moon Jae-in of the liberal opposition Democratic United Party (DUP) in the presidential election held on December 19th.

  Analysis

  Modern South Korea's first female leader will begin her five-year term on February 25th 2013, returning to the Blue House where she lived for 18 years with her father, the military dictator Park Chung-hee, who ruled between 1961 and 1979. The presidential election ended up being a simple two-way contest, and with no electoral college or transferable vote to complicate matters, Park Geun-hye became the first presidential candidate to win an absolute majority. She gained 52% of the votes cast against 48% for Moon Jae-in, representing a margin of over 1m votes. Despite the freezing cold weather, voter turnout was the highest in 15 years, at 75.8%. High voter turnout had been expected to help the DUP, by bringing out younger voters, the party's key support base. Exit poll data suggest that most voters aged under 50 did indeed back Moon Jae-in, but those aged over 50 (who are more numerous in South Korea) plumped for Park Geun-hye. Regional trends followed the usual pattern: the south-west and Seoul supported Moon Jae-in, but this could not dent Park Geun-hye's lead everywhere else.

  Park Geun-hye's victory represents continuity more than change. The Saenuri Party already controls the National Assembly (parliament) and it would have obstructed Moon Jae-in had he won. Her gender is a radical departure in South Korea's male-dominated, Confucian culture, but it remains to be seen if she will implement much-touted policies distancing her from the right-wing incumbent, Lee Myung-bak (who is a lame-duck president ahead of his departure from office in February). Park Geun-hye's main policy themes have been expanding welfare, taming the chaebol (industrial conglomerates) and engaging North Korea. Better social provision is likely, but both the chaebol and North Korea's new leader, Kim Jong-un, will prove more intractable problems.

  Although dismaying almost one-half of the electorate, the continuity represented by Park Geun-hye's win is a relief for foreign business, the US and the country's other allies. Having shown great skill in party politics, the test of holding elected office now awaits her. In that regard, she is an unknown quantity, facing many challenges both at home and abroad.

  December 20, 2012

• Background

  South Korea: Key figures

  Lee Myung-bak

  A forceful former executive of Hyundai, once the country's leading chaebol (conglomerate), and ex-mayor of the capital, Seoul, Lee Myung-bak was elected president by a landslide in December 2007. His conservative Grand National Party (GNP) won a slim majority in the National Assembly (parliament) polls in April 2008. Despite this dual mandate, several unwise political appointments and other gaffes have made Lee Myung-bak unpopular with large segments of the population: He may become a lame duck during the last year of his term (South Korean presidents can hold office for just one five-year term), which concludes in early 2013.

  Park Geun-hye

  A daughter of Park Chung-hee, the dictator from 1961 to 1979 who laid the foundations for South Korea's industrial growth, Park Geun-hye led the GNP from 2004 until she stepped down in 2006 to run for president. Defeated for the nomination by Lee Myung-bak, Park Geun-hye remains a power in the GNP's heartland, the south-eastern Gyeongsang region, and controls a bloc of about 60 GNP and other party members of the National Assembly. Park Geun-hye and the president remain at odds over several policy issues, as well as Lee Myung-bak's failure to support her presidential ambitions: if Park Geun-hye does not win the party's presidential nomination, she could run independently, splitting the conservative vote.

  Chung Mong-joon

  One of South Korea's richest men as chief shareholder of a leading shipbuilder, Hyundai Heavy Industries, Chung Mong-joon ran for president as an independent in 2002, but withdrew in favour of Roh Moo-hyun of the Millennium Democratic Party (a forerunner of the Democratic Party, or DP) in order to block the GNP candidate, Lee Hoi-chang. A long-time independent member of parliament for the constituency of Ulsan, where Hyundai has its headquarters, in 2007 Chung Mong-joon joined the GNP and in 2009 became its chairman. Although he resigned from the post after the party's defeat in local elections in June 2010, he may still harbour presidential ambitions.

  Chung Dong-young

  After being defeated in the presidential race by Lee Myung-bak in 2007 as the centre-left candidate and losing his parliamentary seat in April 2008, Chung Dong-young returned to politics with a landslide by-election win as an independent in April 2009. Factionalism meant that the main opposition DP denied him entry at first, but the party has now embraced him. He could be a contender in the 2012 presidential election.

  Sohn Hak-kyu

  Chung Dong-young may run for president again, but if he does he will face competition from the DP's more moderate current leader, Sohn Hak-kyu, whose position has been boosted by his victory in a by-election in a hitherto conservative area in April 2011.

  Oh Se-hoon

  Not yet 50, a lawyer, Oh Se-hoon, succeeded Lee Myung-bak as mayor of Seoul in 2006. Narrowly re-elected in 2010 despite a strong swing towards the DP, his young and modern image renders him well placed to seek the GNP's presidential nomination in 2012.

  July 25, 2011

• Structure

  South Korea: Political structure

  Official name

  Republic of Korea

  Form of state

  Presidential system; the president and the National Assembly (parliament) are directly elected; members of parliament (MPs) are elected using a mixed system of first past the post and proportional representation

  The executive

  The president (elected for a single term of five years) appoints the State Council (cabinet), which comprises the president, the prime minister and 15-30 ministers. Cabinet ministers are not normally members of the National Assembly

  Head of state

  Elected president

  Legislature

  Unicameral Kuk Hoe (National Assembly) elected for a four-year term. The new assembly, which was elected in April 2012, has 300 seats. Most of the assembly's seats are filled by election from geographical constituencies, with the remainder distributed among the various parties in proportion to their shares of the national vote. The conservative Saenuri Party (formerly known as the Grand National Party) has 149 MPs, and the main opposition centre-left Democratic Unity Party (DUP) has 127

  National elections

  December 2007 (presidential), April 2012 (parliamentary). The next presidential election will take place in December of this year; the next parliamentary poll will take place in 2016

  National government

  Lee Myung-bak of the Saenuri Party, a former mayor of the capital, Seoul, was elected president in December 2007 and began his five-year term in February 2008. He must stand down following the next presidential election in December 2012

  Main political organisations

  Saenuri Party, DUP (formed through a merger of the Democratic Party, the Citizens Integration Party and the Federation of Korean Trade Unions), Unified Progressive Party (created via a merger of the Democratic Labour Party, the People's Participation Party and some members of the New Progressive Party), Forward Unification Party (formerly the Liberty Forward Party)

  Main members of State Council

  President: Lee Myung-bak

  Prime minister: Kim Hwang-sik

  Key ministers

  Defence: Kim Kwan-jin

  Education, science & technology: Lee Ju-ho

  Employment & labour: Lee Chae-pil

  Foreign affairs & trade: Kim Sung-hwan

  Health, welfare & family affairs: Rim Chemin

  Justice: Lee Kwi-nam

  Knowledge economy: Sukwoo Hong

  Land, transport & maritime affairs: Kwon Do-Youp

  Public administration & security: Maeng Hyung-kyu

  Strategy & finance: Bahk Jae-wan

  Unification: Yu Woo-ik

  Central bank governor

  Kim Choong-soo

  December 07, 2012

• Outlook

  South Korea: Key developments

  Outlook for 2013-17

  • The president, Lee Myung-bak of the ruling Saenuri Party (formerly the Grand National Party), has become a lame duck ahead of the presidential election due on December 19th 2012.
  • Government effectiveness could be hampered in the forecast period if the opposition candidate, Moon Jae-in, wins the presidential poll, as he would have to contend with a Saenuri Party-dominated legislature.
  • The death in late 2011 of the North Korean leader, Kim Jong-il, has generated new uncertainties in South Korea, whose ties with the US will deepen as the two try to bring about economic reform and denuclearisation in the North.
  • The economy is forecast to expand by 3.4% in 2013, underpinned primarily by private consumption growth, as the external sector's contribution will remain subdued. Real GDP will expand by an average of 3.9% a year in 2014-17.
  • In 2013 consumer price inflation is expected to remain within the 2.5-3.5% target range for 2o13-15 set by the Bank of Korea (South Korea's central bank). In 2014-17 price rises will average 2.9% a year.
  • The current-account surplus will rise slightly in 2013, to the equivalent of 2.2% of GDP, from an estimated 2.1% in 2012, owing mainly to a modest recovery in export growth.

  Review

  • In late November the independent candidate, Ahn-Cheol-soo, announced his withdrawal from the presidential race, thereby improving the chances of the centre-left candidate, Moon Jae-in of the Democratic Unity Party.
  • The two remaining candidates have both reaffirmed that they intend to re-engage with North Korea if elected. But they have also both insisted that they will not tolerate the North's nuclear-weapons programme.
  • Lee Myung-bak's successor is expected to continue the resource diplomacy that the current president has pioneered, and will be under pressure to emulate his assertive stance regarding islands that are disputed with Japan.
  • In November the prosecutor-general, Han Sang-dae, resigned and planned reforms to the Supreme Prosecutors' Office were dropped. It will now fall to the next president to implement reforms.
  • Financial regulators have tightened up the rules on currency forward positions at domestic and foreign banks, in an effort to curb the recent rise in value of the won. The changes will take effect from the start of 2013.

  December 07, 2012

Economy:

• Background

  South Korea: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	49.8	Population growth	0.5
  GDP (US$ bn; market exchange rate)	1,116.2	Real GDP growth	3.5
  GDP (US$ bn; purchasing power parity)	1,501b	Real domestic demand growth	2.2
  GDP per head (US$; market exchange rate)	22,434	Inflation	3.4
  GDP per head (US$; purchasing power parity)	30,166b	Current-account balance (% of GDP)	2.3
  Exchange rate (av) W:US$	1,108	FDI inflows (% of GDP)	0.3
  a Actual. b Economist Intelligence Unit estimates.

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  Background: Korea was subjected to colonial rule by Japan from 1910 to 1945, and then to partition by the US and the Soviet Union in 1945. The subsequent war between the two Koreas in 1950-53 cost 4m lives, but neither side won. From that time the Republic of Korea (South Korea) and the Democratic People's Republic of Korea (North Korea) were enemies until the first inter-Korean summit meeting in 2000. Regular contact subsequently led to a cautious thaw in bilateral relations, despite the North's nuclear programme. But since 2008 political relations have deteriorated again, and a new nadir was reached following the shelling by North Korea of a Southern island in 2010. South Korea joined the OECD in 1996.

  Political structure: Following two military coups and several decades of authoritarian rule, since the 1990s South Korea has been a democracy. The constitution provides for a directly elected president, who serves a single five-year term and appoints the prime minister and the cabinet. There is also a unicameral National Assembly (parliament), elected at four-yearly intervals. Lee Myung-bak of the Saenuri Party (formerly the Grand National Party) won the 2007 presidential contest and took office in February 2008. His party also won the April 2008 and April 2012 parliamentary elections.

  Policy issues: The Saenuri Party-led government continues to pursue a business-friendly and economic growth-oriented agenda. Policy is currently focused on implementing fiscal stimulus and maintaining an accommodative monetary policy stance in order to support the economy and fend off risks stemming from the weak economic outlook for the US and the EU. The Bank of Korea (South Korea's central bank) will need to strike a balance between stimulating the economy and maintaining price stability. High levels of household indebtedness are a concern.

  Taxation: Corporate income tax rates range from 10% to 22%. Companies are also subject to a residency surtax applied at a rate of 10% of corporate tax liability. Personal income tax rates range from 8% to 38%. In addition, a residency surcharge of 10% of income tax liability is applied. The value-added tax (VAT) rate is 10%.

  Foreign trade: In 2011 merchandise export revenue (fob) rose to US$553.7bn, while the value of merchandise imports (cif) increased to US$521.6bn.

  Main exports 2011	% of total	Main imports 2011	% of total
  Information & communication products	13.1	Petroleum & petroleum products	17.6
  Semiconductors	9.6	Electrical machinery, apparatus & appliances	11.5
  Chemicals	9.5	Gas	8.5
  Machinery & equipment	9.3	Iron & steel	8.3
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  China	24.2	China	16.5
  US	10.1	Japan	13.0
  Japan	7.1	US	8.5
  Hong Kong	5.6	Germany	3.2

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  December 07, 2012

• Structure

  South Korea: Economic structure

  Data and charts: Annual trends charts

  
  

  

  December 07, 2012

• Outlook

  South Korea: Country outlook

  South Korea: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The prospects for political stability in the forecast period have deteriorated following the election to the National Assembly (parliament) in April. Although the poll delivered a surprising victory for the conservative Saenuri Party, the president, the Lee Myung-bak, who hails from that party, remains widely unpopular. The president and his party can take a certain amount of credit for South Korea's economic performance in the couple of years following the 2008-09 global financial crisis. However, economic growth has slowed recently, and the export sector is currently threatened by the economic troubles affecting the EU. There is also a growing perception that social inequality in South Korea is rising and that the government is excessively supportive of the chaebol (family-run conglomerates). The president's hawkish stance towards North Korea has alienated some voters, who feel that it has caused bilateral tensions to increase since 2010. Although Lee Myung-bak has moderated his stance recently, the death in December 2011 of the North's long-time leader, Kim Jong-il, has created fresh uncertainty.

  ELECTION WATCH: Lee Myung-bak is expected to complete his presidential term and step down in February 2013. Park Geun-hye, who chaired the Saenuri Party from December 2011 to May 2012, and who announced her presidential candidacy in July, benefited most from the outcome of the April 2012 parliamentary election. Not only did she secure a seat in the legislature, but her success in transforming the image of the Saenuri Party during her time as its chair, thereby enabling it to retain its majority at the poll, proved her competence as a leader. However, her presidential campaign has not been easy. She is facing opposition from within the Saenuri Party, partly as a result of her earlier attempts to deselect as parliamentary candidates many legislators whom she saw as too conservative and uninterested in her efforts to reform the party. Her public reputation has also been damaged by claims that during her time as Saenuri Party head a legislator offered money to the party's selection committee to ensure that he was chosen as a candidate for the April election.

  INTERNATIONAL RELATIONS: South Korea will remain vigilant regarding developments in North Korea. Under the new leadership of Kim Jong-un, the North's statements about the South have been hardline, but this is not necessarily a guide to the likely tenor of relations in the future. Once the succession has stabilised, China--the main broker in relations with the North since Lee Myung-bak introduced his tough approach to inter-Korean ties--will press the North for market reforms as a condition for continued aid and diplomatic support. It is debateable whether Kim Jong-un will be able to resist such pressure, given the parlous state of the North Korean economy and the growing importance to the North of Chinese investment. North Korea pledged in February 2012 to suspend nuclear activities in exchange for food aid from the US, but it has since back-tracked on its promise, and genuine denuclearisation will remain only a distant possibility. Whichever candidate wins the imminent presidential election in South Korea, the country's next government will seek to re-engage with the North, not least in order to counter China's growing influence. Uncertainty over North Korea will bind the South Korean government even closer to its traditional ally, the US.

  POLICY TRENDS: Following the success of the Saenuri Party in the April parliamentary election, the administration is expected to maintain a broadly pro-business approach in 2013-17. Although the government will generally remain favourably disposed towards the chaebol, it will make efforts to place limits on their power and give greater support to small and medium-sized enterprises. Should Moon Jae-in win the presidential poll in December (not our central forecast), he may seek to rein in the chaebol further and renegotiate South Korea's recently ratified free-trade agreement with the US, but in doing so he would face strong opposition in parliament. Support for exports is likely to be maintained. From 2013 the statutory ceilings on currency forward positions at domestic and foreign banks will be lowered to help to prevent South Korea's currency, the won, from rising too sharply in value in international foreign-exchange markets, and the authorities may introduce additional capital controls.

  ECONOMIC GROWTH: The latest domestic data suggest that the economy may now be through the worst of its recent downturn. The Economist Intelligence Unit therefore expects real GDP growth to accelerate in 2013, to 3.4%, from an estimated 2.2% in 2012. Private consumption growth will be the main driver of economic expansion next year, facilitated by low interest rates in the first three quarters. Fixed investment growth will pick up to 2.8% in 2013. A modest acceleration in global economic growth will result in a slight improvement in the performance of South Korea's external sector next year, with exports of goods and services forecast to expand by 4.5%. However, the external sector will continue to play only a limited role in driving GDP growth in 2013, as expansion in imports of goods and services will pick up to 3.8% as a result of growth in private consumption and exports.

  INFLATION: We forecast that consumer price inflation will average 2.9% in 2013, up from an estimated 2.3% in 2012 as the domestic economy strengthens slightly, but comfortably within the target range for the next three years of 2.5-3.5% set by the Bank of Korea (South Korea's central bank). In 2014­17 we expect inflation to average 2.9% a year. Weak demand in OECD economies will ensure tough competition in global product markets: as manufacturers struggle to maintain market share, raising prices will be difficult. In addition, the won is expected to strengthen against the US dollar in 2013­16, helping to limit imported inflation. Given that uncertainty persists regarding the global economic outlook and thus also the prospects for the local economy, real wages are expected to rise only slowly. There could be significant deviations from our inflation forecast, however, primarily owing to the volatile outlook for global commodity prices. For example, commodity prices could fall steeply if China's economy experiences a sharp slowdown.

  EXCHANGE RATES: Owing to the openness of the South Korean economy and the attractiveness of the country's financial markets, the won will remain vulnerable to sudden changes in value in 2013-17. The currency has appreciated steadily since May, and in late November financial regulators moved to try to curb the won's rise by tightening the rules on currency forward positions at domestic and foreign banks with effect from the start of 2013. The rule changes, along with the October interest rate cut and the likelihood that the BOK will maintain an accommodative monetary policy stance, point to a weakening in the currency in early 2013, and we expect the exchange rate to average W1,101:US$1 next year. As the government begins to raise interest rates towards the end of 2013 the won will appreciate, to average W1,035:US$1 in 2016. The currency's rise will also reflect the economy's steady productivity gains and the strength of South Korea's current-account position as macroeconomic fundamentals improve. The country's financial markets will remain among the most open in Asia, meaning that exchange-rate volatility could be high, especially if international foreign-exchange markets remain unstable. Notably, elevated tensions with North Korea could put downward pressure on the won's value.

  EXTERNAL SECTOR: After falling to an estimated 2.1% of GDP in 2012, we forecast that the current-account surplus will rise in 2013-14 as export growth recovers. In the latter part of the forecast period the current-account surplus will fall again, as the merchandise import bill grows more strongly owing to expanding domestic demand and South Korea's reliance on imports to meet the bulk of its energy needs. On the services account, spending by outbound tourists from South Korea will exceed the country's tourism earnings. However, South Korea will export significant transport services, helping to keep the services account in surplus over the forecast period. The income account will remain in surplus in 2013-17, as outflows of profits on foreign investments in South Korea will be offset by inflows from the substantial stock of assets held abroad by local firms. The country imports a large amount of oil, and it is therefore vulnerable to instability in producer countries (especially in the Middle East), as this would be likely to cause global oil prices to rise, in turn adversely affecting South Korea's current-account position.

  December 07, 2012

• Forecast

  South Korea: Country forecast summary

  Country forecast overview: Highlights

  • The April 2012 parliamentary election delivered an unexpected victory for the ruling Saenuri Party. However, the president, Lee Myung-bak, remains unpopular. Although in theory the Saenuri Party's majority in parliament gives Lee Myung-bak the ability to legislate effectively, in practice the party's internal divisions mean that he cannot take its full support for granted.
  • An independent candidate, Ahn Cheol-soo, announced his withdrawal from the presidential race in late November. This has boosted the chances of the centre-left candidate, Moon Jae-in of the main opposition Democratic Unity Party, in election on December 19th. However, the Economist Intelligence Unit expects the Saenuri Party candidate, Park Geun-hye, to win narrowly. Should a liberal president be elected, he would have to operate alongside a conservative parliament, and this would hinder government effectiveness in 2013­17.
  • The death of North Korea's long-time leader, Kim Jong-il, in December 2011 has raised fresh uncertainties for the South. It will be some time before the succession of his heir, the 28-year-old Kim Jong-un, is stabilised, and in the interim it is possible that the North may become more bellicose as a method of asserting itself during its period of transition. The disquiet caused by Kim Jong-il's death will bind South Korea closer to its traditional ally, the US.
  • We expect the Bank of Korea (BOK, South Korea's central bank) to maintain its current accommodative monetary policy stance until late 2013. In October the BOK cut interest rates for the second time this year. Monetary policy will be tightened only gradually, as higher interest rates raise the cost of investment, inflict financial pain on South Korea's highly leveraged household sector and attract hot money, causing the won to strengthen and thus hurting exporters.
  • Domestic demand will expand steadily in the forecast period, driven by relatively strong local consumer demand. The subdued economic outlook for some of South Korea's major export markets, such as Europe, will limit the contribution of net exports to economic expansion. Real GDP is forecast to grow by 3.4% in 2013 and by an average of 3.9% a year in 2014-17.
  • The won will appreciate against the US dollar in 2013 and will remain on a strengthening trend over the remainder of the forecast period, in line with South Korea's strong economic fundamentals. Tighter rules on currency forward positions at domestic and foreign banks will be implemented by the authorities at the start of 2013 in an effort to curb the won's rise. Annual consumer price inflation will average 2.9% in 2013-17.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	2.2	3.4	3.9	3.7	3.9	4.1
  Consumer price inflation (av; %)	2.3	2.9	3.1	2.9	2.9	2.8
  Budget balance (% of GDP)	2.1	2.5	2.6	2.4	2.3	2.0
  Current-account balance (% of GDP)	2.1	2.2	2.6	2.4	2.3	2.1
  Commercial banks' prime rate (av; %)	5.8	6.0	6.5	7.4	7.5	7.5
  Exchange rate W:US$ (av)	1,128.5	1,100.8	1,083.3	1,041.0	1,035.0	1,040.0
  Exchange rate W:¥100 (av)	1,422.0	1,332.4	1,249.3	1,169.8	1,123.0	1,137.7

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  December 07, 2012

View detailed map

Country Briefing

Land area

99,678 sq km

Population

48.2m (2010; National Statistical Office)

Main towns

Population in '000 (2010)

Seoul (capital): 9,895

Busan: 3,663

Daegu: 2,481

Incheon: 2,475

Daejeon: 1,368

Gwangju: 1,414

Climate

Continental, with extremes of temperature

Weather in Seoul (altitude 87 metres)

Hottest month, August, 26.5°C; coldest month, January, minus 0.4°C; driest month, January, 10.8 mm average rainfall; wettest month, July, 274.1 mm average rainfall

Language

Korean

Measures

Metric system. Some local measures are:

1 pyong = 3.3058 sq metre

1 chungbo = 0.992 ha

1 suk = 100 dai = 180.39 litres

1 kwan = 1,000 don = 3.75 kg

Currency

Won (W). Average exchange rates in 2011: W1,108:US$1; W1,385:¥100

Time

9 hours ahead of GMT

Public holidays

January 1st (New Year's Day); January 22nd-24th (Lunar New Year); March 1st (Independence Movement Day); May 5th (Children's Day); May 28th (Buddha's Birthday); June 6th (Memorial Day); August 15th (Liberation Day); September 29th-October 1st (Chuseok holidays); October 3rd (National Foundation Day); December 25th (Christmas Day)

March 14, 2012