[Contribution] Korea's challenges and tailwinds

[Contribution] Korea's challenges and tailwinds

Dave Chia, an economist at Moody’s Analytics / Courtesy of Moody’s Analytics

By Dave Chia

Korea is one of the better performing economies in the Asia-Pacific region this year. Exports will be the best remedy for the pandemic-scarred economy, while hefty household debt coupled with a heated real estate market will be key challenges.

Like other economies, Korea has battled with a series of stop-start social distancing measures to combat repeated waves of COVID-19. Nevertheless, it was one of the few where output surpassed pre-pandemic levels in the March quarter of 2021. Second-quarter GDP growth lost some steam, and the third quarter will likely remain soft. We forecast GDP growth to notch 4.2 percent in 2021 and 3.3 percent in 2022. This is slightly more optimistic than the Bank of Korea’s respective 4 percent and 3 percent forecasts for those years.

The Korean economy has a few troubles. Number one is rising household debt. This stands at 104 percent of GDP, according to the Institute of International Finance (IIF). Over the past decade, surging property prices and credit card spending have fueled household debt. This is a problem not just for households, but also for the broader economy given the systemic importance of households.

The appetite for cheap credit has been strong thanks to the sustained low interest rate environment. After more than a year at a record-low 0.5 percent, the central bank lifted the policy rate to 0.75 percent in August. In the second quarter, household debt climbed 6 percent from 2020, faster than in any other country, according to data from the IIF. Mortgages constitute over half of total credits to households. Growing household debt is inextricably linked to the heated housing market, making owning a home a distant dream for lower- and middle-income families

In recent years, a series of macroprudential tools such as mortgage loan caps and higher property sales taxes haven’t tamed the heated market. Data from the Korea Appraisal Board shows that average property prices in Seoul have increased more than 70 percent in four years. There’s no reason to think these cooling measures will bring boiling prices to a simmer in the near term. Often circumvented by speculators, the measures are an extra burden for lower- and middle-income-class households and first-time home buyers.

Korea was the first major Asian economy to lift interest rates in 2021. The 25-basis-point increase is too small to address the country’s high household debt and property affordability problems, which is why another rate hike of the same magnitude is expected before the end of the year. Nonetheless, even if interest rates get back to where they were before the pandemic (the policy rate was 1.25 percent in December 2019), the problem of household debt and inflated housing prices would not be adequately addressed. Regulations specifically targeted at speculators are needed. With demand for housing consistently outstripping supply, an increase in new housing construction is also necessary.

Korea’s strong export position is a bright spot in the economy. The nation is well-positioned to continue capitalizing on the global chip shortage and growing demand for electric vehicles. Automobiles and semiconductors accounted for more than 25 percent of Korea’s total exports in August and have done so for the past 18 months. The percentage will likely increase to over 30 percent in the next three years.

The outlook for semiconductor and automobile exports in the near term is strong. The government has designated these industries as key export drivers and is providing financial incentives to support capacity, research and development. We expect Korea’s export performance to be robust through 2024 thanks to the combination of buoyant external demand and the targeted government incentives for key sectors.

Domestic demand is forecast to enjoy a sustained recovery from early 2022 as rising vaccination rates pave the way for aggressive movement controls to be a feature of the past. Korea’s proposed record 604.4 trillion budget for 2022, an 8.3 percent increase from the original 2021 budget, will include measures to boost domestic demand and aid job recovery in vulnerable sectors. Even though these fiscal measures are necessary, there’s a trade-off involved relating to national debt, which has been rising. The country’s national debt-to-GDP is expected to increase to more than 50 percent in 2022, up 10 percentage points from five years ago. Fiscal consolidation will likely take place in 2023 to save future generations from an excessive national debt burden.

Korea’s economic growth stands to benefit from its advantageous position as a major exporter of sought-after semiconductors and automobiles. Even though the country continues to be at the mercy of the Delta variant, strong fiscal support alongside increasing vaccinations is expected to fuel recovery in consumption through 2022. Nonetheless, Korea’s high household debt and heated real estate market remain as long-term downside risks that could cloud the otherwise upbeat economic outlook.

The writer is an economist at Moody’s Analytics.

“Please note that this analysis has been authored by Moody’s Analytics, which operates independently of the Moody’s Investors Service credit rating agency. Please use the full name, Moody’s Analytics, when citing our research to avoid confusion.”

Internet Explorer Channel Network
News Related


Brent oil falls after closing above US$85 as China seeks to ease energy crisis

NEW YORK (BLOOMBERG) – Brent oil declined from its highest level since 2018 as a US industry report pointed to an increase in crude stockpiles and China unleashed measures aimed ... Read more »

Nord Stream 2 to fill gap in energy market, says Russian ambassador in Germany

Sergey Nechayev expressed hope that the new German government would support Nord Stream 2 as the project meets the interests of both the country’s economy and its population as it ensures energy security Read more »

Prosecutors resummon key figures in land development scandal all on same day

This composite file photo shows Kim Man-bae, Nam Wook and Yoo Dong-gyu (from L to R), key suspects in a growing scandal surrounding a highly lucrative land development project in ... Read more »

Hainan's foreign trade grew 60.4% in the first three quarters of 2021

The province's export grew 27.5% and up to 24.1 billion yuan over the period Read more »

Russian arms exports total $15 bln annually, Deputy PM's office says

According to Yuri Borisov, Russia is holding on to second place among defense exporters Read more »

Representatives of the Li people in Hainan held a workshop on the art of weaving

Many centuries ago the women of this people mastered a unique technique of spinning and weaving, dyeing and embroidery Read more »

Scientists wrap up Russia-US expedition to study climate changes in Arctic

During the expedition, AARI scientists have taken more than 9,000 water samples and tested them onboard Read more »

Russian Arctic National Park needs 9,000 tonnes of waste to be removed, director says

According to results of the geo-ecology survey, conducted in 2017, the cleanup had been completed by about 89% Read more »

Incheon's Yeonsu-gu to host UNESCO's Learning Cities conference next week

Songdo Convensia (Yeonsu-gu, Incheon)Incheon’s Yeonsu-gu will host the fifth International Conference on Learning Cities, which kicks off next week with an aim to reinforce The international event will take place ... Read more »

KB Kookmin buys additional 30% stake in Cambodian microfinance unit

KB Kookmin Bank headquarters in Seoul / Courtesy of KB Kookmin Bank Major South Korean lender KB Kookmin Bank said Wednesday it has acquired an additional 30 percent stake in ... Read more »

Court delays decision for SsangYong's new owner

SsangYong Motor Pyeongtaek plant in Gyeonggi Province / Yonhap Seoul Bankruptcy Court potstones decision to select preferred bidder of SsangYong Motor By Kim Hyun-bin The Seoul Bankruptcy Court has postponed ... Read more »

Amid US-China row, Tesla's growth benefits Korean suppliers

An aerial photo made with a drone shows empty employee parking lots at the Fiat Chrysler Belvidere assembly plant near Belvidere, Il., Oct. 18. EPA-Yonhap By Kim Yoo-chul Tesla’s continuing ... Read more »

Tailim Paper IPO draws controversy

Stacks of corrugated sheets of cardboard. Korea Times file By Lee Kyung-min Criticism is mounting against a planned bid for an initial public offering (IPO) by Tailim Paper, a delisted ... Read more »

[ANALYSIS] US bitcoin ETF debut will not boost crypto growth in Korea

A digital banner for the newly listed ProShares Bitcoin Strategy ETF is displayed on the floor of the New York Stock Exchange (NYSE) on Tuesday in New York City. AFP-Yonhap ... Read more »

Financial regulator expected to unveil additional steps to curb household debt next week: sources

SEOUL, Oct. 20 (Yonhap) — South Korea’s financial regulator is expected to announce additional measures next week to tame runaway household debt that will focus on toughening requirements for the ... Read more »

[FULL TEXT] Actor Kim Seon-ho belatedly admits to forced abortion rumor, apologizes

Actor Kim Seon-ho / SALT Entertainment By Park Ji-won Actor Kim Seon-ho, who shot to stardom in tvN’s romance series, “Start-Up,” followed by “Hometown Cha-Cha-Cha,” indirectly admitted Wednesday that he ... Read more »

Memorial for Korean atomic bomb victims to be erected in Japan's Nagasaki

A conception of a memorial stone for Korean victims of the U.S. atomic bombing of Nagasaki, Japan, provided by South Korean Consulate-General in Fukuoka. The monument is schedule to be ... Read more »

K Shipbuilding to join forces with Norwegian firm for smart ships

By Nam Kwang-sik SEOUL, Oct. 20 (Yonhap) — Midsized shipyard K Shipbuilding Co., formerly known as STX Offshore & Shipbuilding Co., said Wednesday it has signed a preliminary deal with ... Read more »

NK confirms test of submarine-launched ballistic missile

In this photo, released by North Korea`s Korean Central News Agency on Wednesday, shows a submarine-launched ballistic missile being fired in waters off the east coast the previous day. (KCNA-Yonhap)North ... Read more »

FM Chung says N. Korea sanctions relief can be an option if it accepts dialogue offer

Foreign Minister Chung Eui-yong speaks during a parliamentary audit session held at the National Assembly on Wednesday. (Yonhap)North Korea’s recent missile test underscores the need for engaging the reclusive state ... Read more »

Chip crunch sees Malaysia's big-name customers happy to pay more

KUALA LUMPUR (REUTERS) – Malaysian electronics firms central to the supply of basic chips that drive the world’s cars, smartphones and home devices say big-name customers are beating on their ... Read more »

Regional universities experience student shortage

Pusan National University’s campus / Korea Times file By Bahk Eun-ji Lee Ju-young, who graduated from high school in Gangneung, Gangwon Province, in 2020, was admitted to Kangwon National University, ... Read more »

Yoon Seok-youl in hot water for defending ex-dictator

Presidential hopeful Yoon Seok-youl (Yonhap)Yoon Seok-youl, a leading presidential contender for the main opposition People Power Party, on Wednesday hastened to provide an explanation for his remarks that seemed to ... Read more »

(News Focus) Hyundai, Daewoo vying to win order for S. Korea's 1st aircraft carrier

By Nam Kwang-sik SEOUL, Oct. 20 (Yonhap) — South Korea’s two leading shipbuilders are competing against each other to obtain an order for the country’s first light aircraft carrier. The ... Read more »

(LEAD) S. Korea considering temporary fuel tax cut amid surging gasoline prices

(ATTN: ADDS minister’s remarks on tax plan for cryptocurrency in last 4 paras) SEOUL, Oct. 20 (Yonhap) — South Korea is considering temporarily lowering fuel taxes to ease consumer burden ... Read more »

Korean Air to resume flights to Hawaii next month

SEOUL, Oct. 20 (Yonhap) — Korean Air Lines Co., South Korea’s biggest carrier, said Wednesday it will resume flights to Hawaii next month after suspending the route for 19 months ... Read more »

SK develops world's fastest HBM3 DRAM

SK hynix’s new HBM3 DRAM / Courtesy of SK hynix By Yi Whan-woo SK hynix said Wednesday it has developed the world’s fastest DRAM chip _ the High Bandwidth Memory ... Read more »

Sun Cable taps five firms to help deliver solar energy to S'pore via undersea link

SINGAPORE – Australia’s Sun Cable is plugging into the expertise of five companies for one of the world’s most ambitious solar energy projects that is aimed at supplying up to ... Read more »

Facebook plans to change name: report

In this Aug. 12 file illustration photo, the Facebook logo is seen on a smartphone in front of a computer screen in Los Angeles. AFP-Yonhap Social media giant Facebook is ... Read more »

Coinbase inks deal to become exclusive cryptocurrency platform for NBA, WNBA, USA Basketball

According to Coinbase, they will have a brand presence featured during nationally televised games beginning with tonight’s tip-off of the NBA’s 75th Anniversary season. Nasdaq-listed cryptocurrency exchange Coinbase has inked ... Read more »

Deripaska spokesperson denies US searches were part of criminal case

"The warrants are related to sanctions," she said Read more »

S. Korea considering temporary fuel tax cut amid surging gasoline prices

SEOUL, Oct. 20 (Yonhap) — South Korea is considering temporarily lowering fuel taxes to ease consumer burden from surging gasoline prices, the country’s top economic policymaker said Wednesday. Finance Minister ... Read more »

S. Korea's largest offshore wind farm exhibits low 22% capacity utilization rate

The 60 megawatts (MW) wind farm is located in the coastal waters of Buan, North Jeolla Province.  South Korea’s largest offshore wind farm is exhibiting a low capacity utilization rate at 22 ... Read more »

New virus cases rise on more testing

Social distancing signs on precautions against the coronavirus are displayed at the entrance of the Seoul International Aerospace and Defense Exhibition 2021 at the Seoul Military Airport in Seongnam, Oct. ... Read more »

Moon says S. Korea seeks strong defense capability to ensure peace

President Moon Jae-in (Yonhap)Ensuring peace is the reason for South Korea to build strong defense capabilities, President Moon Jae-in said Wednesday, as the country seeks to build a military based ... Read more »

N. Korean threat won't change even after end-of-war declaration: ex-USFK chief

Curtis Scaparrotti (L), former commander of the US Forces Korea, attends a breakfast meeting with security experts in Seoul on Wednesday. (Yonhap)North Korean security threats won’t change even if a ... Read more »

Japan exports rise more than expected in September, hopeful sign amid supply chain crunch

TOKYO (REUTERS) – Japan’s exports grew faster than expected in September to post a seventh straight month of double-digit growth, an encouraging sign for the economy as pandemic-led global supply ... Read more »

[Graphic News] Cancer remains leading cause of death in S. Korea

Cancer remained the top cause of death in South Korea, with the number of deaths hitting a record high last year, a government report showed. In 2020, 304,948 deaths were ... Read more »

USFK reports 32 additional COVID-19 cases

(Yonhap)Thirty-two people affiliated with the US Forces Korea (USFK) have tested positive for COVID-19, the US military’s infection tally showed Wednesday. Among the new cases counted from Oct. 9 to ... Read more »

Lawyer at center of corruption-laden development scandal released after 2-day probe

Nam Wook (C), a key figure in a sprawling land development scandal in Seongnam, Gyeonggi Province, is swarmed by reporters at Incheon International Airport, west of Seoul, on Monday, after ... Read more »
On free-english-test.com you will find lots of free English exam practice materials to help you improve your English skills: grammar, listening, reading, writing, ielts, toeic