We expect South Korea's real GDP growth to slow to a belowconsensus 1.9% in 2012. China has recently lowered its GDP growth forecast, while our core view of a eurozone recession remains firmly in play. Disinflation has clearly started to take hold and further weakness in the domestic economy is likely to place further downward pressure on prices. As inflation continues to ease, the central bank is likely to have more room to enact further monetary easing. Consequently, we are pencilling in at least one more 25-basis-point rate cut in the coming months.
The domestic property market is likely to remain weak through much of 2012 amid the bleak economic landscape. A supply overhang and the country's perennial household debt situation are also likely to keep downward pressure on prices. Pledged increases in welfare expenditure that politicians have used as a vote-buying tactic will be funded by debt, given that budgetary adjustments and tax increases are likely to be out of the question. As a result, the country's fiscal position is likely to come under pressure should the government allow welfare expenditure to rise unchecked. Despite Moody's upgrading of the country's sovereign credit rating, we remain less optimistic of South Korea's fiscal fundamentals.
The household balance sheet has started to deteriorate and we expect further worsening as the unwinding of household debt gains pace. A sharp deterioration in the country's public finances is likely to ensue, and we consequently expect to see a re-pricing of sovereign risk. Forecast Changes We expect the economic weakness to extend into 2013 and have seen fit to downgrade our growth expectations to 3.0% from a previous estimate of 4.5%. The revision sees downward adjustments across all growth components, with the largest changes seen in private consumption and net exports. We continue to see the latter as the main drag on growth in 2013.
Key Risks To Outlook
Downside Risks To Economic Growth Forecast: Should we see a sharper-than-expected downturn in the global economy or even an implosion in South Korea's household debt market, we would certainly expect to see a substantial weakening in its exports sector, which, in turn may push the economy into a pronounced recession
Downside Risks To Monetary Policy Forecast: In the event that the economy worsens beyond expectations, while deflationary concerns come to the fore, the central bank is likely to enact a more aggressive monetary stance.
Table of Contents
Executive Summary
Core Views
Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Chaebol Reform Unlikely To Push Through
Chaebol-bashing will continue in the run-up to South Korea's presidential elections in December Both the ruling Saenuri Party and
the main opposition Democratic United Party will face considerable difficulty in their bid for chaebol reform, given how intricately the
chaebols are weaved into South Korea's economy, as well as its political system
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Three Reunification Scenarios And Their Implications
The prospect of eventual reunification of the Korean Peninsula appears to have been enhanced following the death of Kim Jong Il in
December 2011 While the timing of reunification is impossible to call, we believe a gradual integration of the two Koreas remains the
most desirable outcome Nonetheless, the path towards unification is fraught with massive risks for North and South, as well as China
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Subpar Growth Unavoidable, Further Easing To Come
South Korea's economy slowed in the second quarter in line with our expectations Sectoral indicators suggest that the deterioration
in trade and investment activity is likely to gain traction in the quarters ahead and we believe that the economy is well on its way to
meeting our below-consensus real GDP forecast of 1 9% for 2012
TABLE: ECONOMIC ACTIVITY
Balance Of Payments
Oil Price Reversal To Tame Record CA Surplus
The recent widening of South Korea's current account to a record surplus is likely to prove fleeting As the recent recovery in crude
oil prices start to feed through, while exports remain suppressed, we expect the widening current account surplus to reverse course
Looking into 2013, following expectations of a recovery in economic activity, we expect the dual dynamics of high oil prices and
inventory restocking pressures to lead an outperformance of imports over exports, causing a further narrowing in the current account
surplus
TABLE: CURRENT ACCOUNT
Fiscal Policy
Risks Ever-Present Despite Ratings Upgrade
We do not share Moody's optimism regarding South Korea's sovereign credit fundamentals The government's fiscal position will come
under threat from the rising levels of debt undertaken by public corporations Meanwhile, Korean banks face increasing risks from an
expected deterioration in household balance sheets as the economy continues to sour Given these factors, we may well witness a
sharp deterioration in the country's public finances in the coming quarters and, by extension, a re-pricing of sovereign risk
TABLE: FISCAL POLICY
Monetary Policy
BoK Pauses, But Not For Long
The Bank of Korea's decision to keep rates on hold in August is likely to come about as policymakers assess the effects of July's cut on
the economy We continue to witness an abject performance in the country's export performance and forward-looking indicators suggest
that a near-term recovery is unlikely to be in order Additionally, we believe that the domestic disinflationary trend is likely to maintain its
course and deflation remains a growing prospect
TABLE: MONETARY POLICY
Chapter 3: 10-Year Forecast
The South Korean Economy To 2021
Robust Growth To 2021
We are expecting annual real GDP growth in South Korea to decelerate marginally from an average of 4 4% between 2001 and 2008 to
around 4 2% over 2012-2021 While we see many of South Korea's traditional exports meeting fierce competition in the coming years
from emerging Asia, we believe that underlying conditions within the country are conducive to a move up the production value chain,
ensuring a robust economic growth profile Furthermore, we see private consumption being a key contributor to growth over this forecast
period
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
Institutions
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
TABLE: BMI LEGAL FRAMEWORK RATING
TABLE: LABOUR FORCE QUALITY
Infrastructure
TABLE: ASIA, ANNUAL FDI INFLOWS
TABLE: TRADE AND INVESTMENT RATINGS
Market Orientation
TABLE: TOP EXPORT DESTINATIONS
Operational Risk
Chapter 5: Key Sectors
Pharmaceuticals
TABLE: PHARMACEUTICAL SALES INDICATORS 2008-2016
TABLE: PRESCRIPTION DRUG SALES INDICATORS 2008-2016
TABLE: PATENTED DRUG MARKET INDICATORS 2008-2016
TABLE: OTC MEDICINE SALES INDICATORS 2008-2016
TABLE: GENERIC DRUG SALES INDICATORS 2008-2016
Telecommunications
TABLE: TELECOMS SECTOR – INTERNET – HISTORICAL DATA & FORECASTS
TABLE: TELECOMS SECTOR – FIXED-LINE SECTOR
TABLE: TELECOMS SECTOR – MOBILE – HISTORICAL DATA & FORECASTS
TABLE: TELECOMS SECTOR – ARPU – HISTORICAL DATA & FORECASTS
Other Key Sectors
TABLE: AUTOS SECTOR KEY INDICATORS
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS
TABLE: OIL AND GAS SECTOR KEY INDICATORS
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS
TABLE: FREIGHT KEY INDICATORS
Chapter 6: BMI Global Assumptions
Global Outlook
A Pivotal Autumn Approaches
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 51
