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South Korea charts a steady course

South Korea has achieved advanced world levels of income with growth based around the success of its consumer electronics, digital and heavy industry activities. Its economy is performing well.

| 5 min read

South Korea’s per capita income stood at $33,600 in 2022, with gross domestic product (GDP) now at $1.8 trillion, based on a population of 52 million. It is a democratic country, with a directly elected executive president and an elected unicameral parliament as the legislature and a check on the government.

Despite the country’s progress to advanced-world levels of income it is still in the MSCI Emerging Market equity index as one of the big four countries that make up almost three quarters of its market capitalisation. This categorisation is related to liquidity and access issues surrounding the stock exchange.

There have been questions over the governance of some of the larger South Korean family-owned conglomerates, which may also have substantial outside shareholders and a market quote. Samsung is the giant amongst the giants of the so-called chaebol companies, the large conglomerates which dominate the economy.

Samsung is the second-largest company in the wider MSCI Emerging Market index, after Taiwan Semiconductor Manufacturing Co (TSMC). The Korean equity index is 43% in technology, 13% industry, 9% financials and 9% materials, reflecting the relative profitability and ownership patterns of these different sectors.

South Korea’s success with economic policy

The central bank has done a better job controlling inflation than the leading advanced countries, with price rises peaking around 5% at beginning of 2023. Inflation is back down to 3.3%. Interest rates were increased from 0.5% in 2020 to 3.5% today. This is likely to be the peak, with falls next year as the bank receives confirmation that core inflation returns closer to 2%. South Korea is a heavy importer of energy.

The Bank of Korea forecasts 1.4% growth this year, with an acceleration to 2.1% in 2024. Korean shipyards have been winning plenty of orders as they compete against China as the two leading shipbuilding nations. Demand for new liquified natural gas (LNG) tankers has been strong as Europe seeks to diversify away from piped gas from Russia. South Korea is dominant in this sector.

The South Korean vehicle industry is ranked fifth in the world, producing just under 4 million units. It is comparable in size to Germany’s industry by volume of vehicles. Kia and Hyundai are now global brands. In 2022, only China, the US, Japan and India produced more vehicles. South Korea alongside Japan is developing hydrogen fuel cell vehicles as well as battery electric products. Steel is also an important industry where Korea is in the top six worldwide producers.

The economy is dominated by the chaebols. Samsung is the foremost, with big businesses in consumer electronics, shipbuilding, construction and insurance. In 2022, Samsung’s revenue accounted for more than a fifth of national GDP. Lotte is a dominant food producer. LG is another large player in the world consumer electronics market. SK is a leading chemicals and telecoms provider. Hyundai is a major auto maker. The top chaebols account for more than half South Korea’s output.

Relatively stable government with hard-fought politics

In 2022, a close fought presidential election resulted in a People Power Party President securing a five-year term. He must work with a Parliament elected in 2020 with a Democratic Party majority, leading to bitter struggles between the legislature and the executive.

A recent attempt by the parliament to force the resignation of the prime minister was rejected by the president as he is entitled to do. Next year brings a general election to parliament. Current opinion polls show the two main parties close to each other and imply continuing difficulty for the president’s party to gain a majority.

Government policy has provided a modest stimulus to the economy to avoid a recession and higher unemployment. State debt is around 55% of GDP, and the running deficit is kept under good control.

The US is a staunch ally of South Korea, helping guarantee the border and acting as a deterrent to North Korea.

The Korean war, fought between 1950 and 1953, led to 2.5 million deaths and much destruction. The eventual truce led to a strong frontier being created between North and South Korea, with a demilitarised zone between the two countries. Since then, North Korea has become a communist state cut off from most of the rest of the world, falling badly behind in economic development.

South Korea, following a mixed-economy democratic model, has flourished in contrast. Tensions remain. The US is a staunch ally of South Korea, helping guarantee the border and acting as a deterrent to North Korea seeking to expand by force of arms. Whilst North Korea regularly provokes the US grouping of countries in the area by testing missiles and increasing its armament, it remains unlikely that the country will seek to invade the south against formidable US-backed defences.

South Korea has performed well over many years to become a relatively-rich nation with strong exporting industries. The state of the public accounts and control of inflation leave scope for more stimulus going into 2024 with the prospect of some pick-up in growth, subject to world demand.

South Korea remains competitive through the large conglomerates who have established good positions in several major market areas. The exporters will benefit from stronger world demand when the main advanced countries pivot more to growth and relax their current monetary tightening.

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South Korea charts a steady course

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