Given its world-class manufacturing sector, strategic information and communications technology (ICT) adoption, generous fiscal measures, and strong public health management, South Korea epitomised economic resilience during the pandemic. Its systemic approach and technological solutions have been lauded and duplicated by other nations.
By the first half of 2021, the government said it should have inoculated 12 million people. How this vaccination drive will help President Moon Jae-in in making South Korea one of the world’s top 10 economies this year remains to be seen.
South Korean Economy Overview
South Korea’s history of economic success is sustained by its ability to adapt to the accelerating pace of global change. It is the fourth biggest economy in Asia and the 12th largest GDP by nominal. Its massive transformation after the end of the Korean War in 1953 turned the country into an industrial powerhouse and opened its gates to foreign economies.
Its export-oriented policies and investment in innovation played a crucial role in developing the economy into what it is now. The government’s economic strategy allowed real GDP growth to average 7.3% annually between 1960 and 2019. Last year, South Korea’s GDP contracted 1% from 2019. According to the Organization for Economic Cooperation (OECD) showed that South Korea’s nominal GDP reached US$1.62 trillion in 2020.
While service industry jobs and consumer spending were down during the coronavirus pandemic, the increased demand for work-at-home electronics contributed positive growth for the country’s technology exports. OECD data revealed that unemployment in South Korea reached a nearly 21-year high in January 2021, the highest since 1999. The Bank of Korea noted that recovery for industries hit by the pandemic may take a longer time.
The International Monetary Fund (IMF) predicts that the South Korean economy will grow 3.1% in 2021. In general it is expected that the country returns to pre-pandemic levels as it continues to mitigate Covid-19 impact and expands the government’s fiscal spending.
Currency and Central Bank
The South Korean won is the country’s official currency and is issued by the central bank, the Bank of Korea (BOK). The current weakness of the won may be perceived as an anomaly since investors’ risk appetite has been recovering, yet the currency is exhibiting a downward trend. Since the beginning of the year, the won has fallen by nearly 2% versus the US dollar and is underperforming compared to its emerging Asian peers amid growth forecasts for the global economy.
This may be attributed to fund flows, after domestic investors purchased overseas bonds and stocks in January worth $6.2 billion, the largest recorded by the Korea Securities Depository since 2011. Additionally, $5.3 billion worth of local stocks were offloaded by foreign money managers during the last week of January, representing the period’s largest since 1999.
In February, headline inflation increased at a higher-than-expected rate but did not reach the Bank of Korea’s target of 2%. For the year, the central bank forecasts inflation to average at 1.3%, which is 0.5% higher than in 2020.
The country’s benchmark consumer price index (CPI) rose by 1.1% year-on-year following a 0.6% increase in January. This beats the median forecast of a 1.0% increase issued by economists polled by The Wall Street Journal.
Following the decision to keep the base interest rate at a historic low of 0.5%, BOK Governor Lee Ju-yeol said that for the meantime, talks of normalising policies or interest rate hikes would be inappropriate.
The South Korean central bank is expecting an economic expansion of 3% in 2021 after the country experienced a 1.0% contraction last year.
Industry and Trade
South Korea has transformed from an agricultural country to a highly industrialised one over the past 60 years and is now recognized as the largest semiconductor producer in the world. The economy’s leading industries are electronics, automobile production, shipbuilding, textile, and steel.
Data from South Korea’s customs office revealed that exports have grown by double digits in the first 20 days of February due to strong tech product and automobile demand. The Korea Customs Service reported that exports went up by 16.7% during the period year-on-year, reaching $30.4 billion. A 29.2% increase in the daily average export was also recorded during the 20-day period.
Semiconductors are the country’s top export, and it surged by 27.5% during the said period and 13.2% year-on-year, recording an increase for the eighth consecutive month. On the other hand, exports of telecom devices soared by 33.6% while it was a whopping 45.9% for automobile exports.
Of the 15 major export products from the country, 11 posted increases in February. Exports to China, the US, and the European Union went up by 26.5%, 7.9%, and 48.2%, respectively. However, the country’s trade surplus fell from $3.76 billion to $2.71 billion.
The dramatic increase in electric vehicles’ domestic sales should be noted as it is the 12th consecutive month of sales growth for the sector. In January, South Korea’s electric and hybrid vehicle sales went up by 126.4% to 17,992 units, and according to the country’s trade, industry, and energy ministry, it accounted for 13% of South Korea’s total automobile sales for the month.
Survey and Rankings
South Korea received a score of 84.0 in the World Bank’s Ease of Doing Business 2020 report, securing the 5th place out of 190 countries, behind Denmark, Hong Kong, Singapore, and New Zealand.
While the World Economic Forum’s Global Competitiveness Index (GCI) rankings have been paused, the South Korean economy ranked first in its ICT adoption list of the 2020 special edition of the Global Competitiveness Report.
Additionally, South Korea ranked 24th with a score of 74.0 in the Heritage Foundation’s 2021 Index of Economic Freedom, maintaining its spot in the “mostly free” category.
Stock Exchanges and Capital Markets
The Busan-based Korea Exchange (KRX) remains the only securities exchange operator in the country after the Korea Stock & Futures Exchange Act integrated the Korea Stock Exchange (KSE), Korea Futures Exchange, and KOSDAQ Stock Market.
The Korea Composite Stock Price Index (KOSPI), which is the representative stock market index of South Korea, is calculated based on market capitalization. Since 2021 began, the KOSPI has gained 203 points or 7.07%.
Foreign investors may bet on the country’s economy through exchange-traded funds (ETFs) that offer immediate diversification. These ETFs mostly focus on large- to mid-sized companies.
The South Korean bond market is one of the largest in Asia. Over the past years, it has undergone several reforms and development geared toward slow but steady market liberalisation. Foreign investors are welcome to purchase all types of fixed-income instruments. Korean bonds are either government or corporate bonds.
The government issues 3-year, 5-year, and 10-year bonds on a regular basis, and may be in the form of treasury bonds, National Housing Bonds, and Seoul Metropolitan Subway Bonds.
In 2020, the central bank bought $9.92 billion in government bonds as part of an initiative to stabilize markets at the height of the pandemic. Governor Lee has told parliament members that BOK is ready to make bond purchases again this year.
Real Estate Market
Prices of real properties in South Korea have continued to increase despite new government policies aimed at stabilising the housing market in the country. This has been attributed to the declines in interest rates, and during the first 11 months of 2020, the nationwide housing purchase price composite index went up by 7.26%, the highest surge since October 2007.
This price surge has attracted foreign investors and local multi-homeowners to buy houses as an investment. With owning a house traditionally perceived as a sign of stability, surveys show that 83% of South Koreans want to have their own houses.