Economic Outlook 2017: Korea

South Korea kicked off the new year under a political cloud with President Park Geung-hye suspended from office after her December 2016 impeachment over alleged corruption and influence peddling.

The scandal has extended into the economy after accusations that Park colluded with a long-time confidante, Choi Soon-sil, to pressure Samsung and other Korean conglomerates, or chaebol, to donate to Choi’s charities in exchange for political favors.

Samsung denies any impropriety, as do Park and Choi, and in January a court declined a request from prosecutors for the arrest on bribery charges of Lee Jae-yong, son and heir apparent of Samsung chairman Lee Kun-hee.

Korean business credibility has nevertheless been damaged, while an abrupt decline in confidence has accompanied the political crisis. In November 2016, the central Bank of Korea’s Composite Consumer Sentiment Index fell to 95.8, the lowest level since April 2009, from 101.9 in the previous month.

It’s not just consumers who are pessimistic, says Herald van der Linde, head of Asia Pacific equity strategy at HSBC in Hong Kong. “Business sentiment remains subdued as a series of headlines detailing the nascent restructuring of heavy industries, the bankruptcy of Korea’s largest shipping company, and smartphone recalls, continue to weigh on confidence.”

Kathleen Oh, an economist with Standard Chartered Bank in Seoul, said reform of the chaebol could be delayed due to the political leadership crisis and weak demand in sectors such as shipping and shipbuilding.

Meanwhile, Samsung will try to bounce back from its exploding smartphone crisis of 2016 by accelerating the release of its new Galaxy S8 model to as early as March 2017. “Samsung may not suffer so much in reputational damage as it runs on technological strength,” said Oh.

Overall, South Korea's gross domestic product rose 2.7% year-on-year in 2016, 0.1% higher than 2015 on the back of higher government spending and private investment, said the Bank of Korea. The Organisation for Economic Cooperation and Development has cut its outlook for Korea’s 2017 growth from 3% to 2.6%.

The weakening of the Korean currency is expected to continue through 2017. Tuuli McCully, senior international economist at Scotiabank in Singapore, expects depreciation by about 4% to close out the year at 1,260 won to the U.S. dollar.

Korea’s broader outlook is clouded by long-term uncertainties, according to Oh, who cites Korea’s rapidly ageing population and dependence on trade with a slowing China.

There are also external political issues: Seoul’s decision to deploy of the Terminal High Altitude Area Defense missile system, supplied by the United States, has upset Beijing. While retaliation has so far been minor, such as the Chinese government’s cancellation of three concerts by the Korean soprano Sumi Jo, further sanctions are on the cards.

Ada Zheng Xin is a master's degree candidate at the University of Hong Kong's Journalism and Media Studies Centre.