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 10th largest by nominal Gross domestic product (GDP). 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. Textiles and light manufacturing were the first industries targeted for economic development before shifting to heavy industries such as iron and steel and chemicals manufacturing.
Later on, South Korea refocused its efforts toward high-technology industries, such as automobile and electronics production, as well as information technology. The government’s economic strategy allowed real GDP growth to average 7.3% annually between 1960 and 2019.
In 2020, South Korea’s GDP growth was at -1% – the worst performance since 1998, due to the coronavirus pandemic-related collapse.
However, the South Korean economy rebounced in 2021, registering a GDP growth rate of 4.0%, its quickest rate in 11 years, powered by robust semiconductor and auto exports.
For 2022, the International Monetary Fund (IMF) predicts a growth of 3.0% and for the following year 2.9%.
South Korea GDP Annual Growth Rate (in %)
However, the IMF warned that the country needs to be vigilant of its government spending to prevent a future debt explosion with its population rapidly aging.
Korean household debt is among the highest in the OECD at over 190% of net household disposable income, a significant portion of which is secured by real estate. Lending has grown quickly across all sectors since the pandemic outbreak, pushing credit as a percent of GDP further above its trend value.
The IMF expects South Korea’s debt-to-GDP ratio to increase to 55.0% in 2022 and reach 66.7% by 2026. The expected growth pace is also the highest among 35 advanced economies. The average ratio of the 35 countries is forecast to decrease to 118.6% from 121.6%, during the same period.
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). Over the past decade, the value of the won has been stable, with $1 equivalent to 1,117 won in February 2011 and as of February 2021, $1 is equivalent to 1,098 won.
The central bank was established on June 12, 1950, in Seoul and is currently led by BOK Governor Lee Ju-yeol. The BOK’s Monetary Policy Committee is tasked with the formulation of monetary and credit policies in the country.
In January 2022, South Korea’s consumer inflation jumped 3.6%, remaining above the central bank’s 2% target for a 10th straight month.
Seeking to restrain inflation and household debt growth, the Bank of Korea hiked its benchmark interest rate from 1.0% to 1.25% in January 2022. The BOK hinted that it could raise interest rates again to more than 1.75% this year, after its three back-to-back hikes since August 2021.
South Korean economy: Inflation (in %)
Industry and Trade
South Korea has transformed from an agricultural country to a highly industrialized one over the past 60 years and is now recognized as the largest semiconductor producer in the world. To foster growth, the country emphasized technology development and innovation.
The service sector has become the largest and fastest economic sector in South Korea, comprising 59% of the country’s GDP while employing 70% of the active population. The leading industries in this sector are department stores, store chains and supermarkets. One of the fastest-growing industries is tourism but it was impacted by the global pandemic.
The manufacturing sector comes next, accounting for 38% of the GDP and providing jobs to 25% of the workforce. The main industries in this sector are textile, steel, automobile manufacturing, shipbuilding and electronics.
Meanwhile, the agricultural sector has lagged behind, only contributing 2% of the nation’s GDP while employing around 4% of the active population. The main agricultural products in South Korea are barley, wheat, corn, soybeans and sorghum. Large-scale livestock farming also plays a big part in this sector.
In 2020, trade represented about 70% of South Korea’s GDP. The country is currently the seventh biggest exporter in the world. Its main export products are integrated circuits, automobiles, refined petroleum, vehicle parts, and passenger and cargo ships. The nation’s main export partners are China, the US, Vietnam, Hong Kong, and Japan.
South Korea Balance of Trade
In terms of total imports, South Korea ranks ninth globally. Its top import products are crude petroleum, integrated circuits, petroleum gas, refined petroleum, and coal briquettes. The country’s top import partners are China, the US, Japan, Vietnam, and Saudi Arabia.
Survey and Rankings
South Korea received a score of 84.0 in the World Bank’s Ease of Doing Business 2020 report, securing 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, the South Korean economy 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.
KRX is the 13th largest stock exchange in the world, with a market capitalisation of $2.42 tn. The Korea Composite Stock Price Index (KOSPI), which is the representative stock market index of South Korea, is calculated based on market capitalization.
Foreign investors may bet on the South Korean 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 in the form of treasury bonds, National Housing Bonds, and Seoul Metropolitan Subway Bonds.
The BOK introduced in June 2021 a three-year maturity monetary stabilization bond (MSB) while reducing two-year MSBs to increase responsiveness in liquidity adjustment. This was after MSB yields declined despite overall increases among longer-dated treasury bond yields.
To curb rising interest rates, the central bank of Korea said in November 2021 that it would buy back treasury bonds ($1.7 bn worth of government bonds), if necessary. Meanwhile, the BOK also plans to reduce the sale of monetary stabilization bonds, to improve investors’ sentiment and ease volatility in the market.
Real Estate Market
Prices of real properties in South Korea have continued to increase despite new government policies aimed at stabilizing the housing market in the country.
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.
The most common type of housing in the country are apartments, which are often high-rise residential buildings ranging between five- to 20-storeys high. These apartments are the most preferred housing type among locals as they are built around facilities like shopping centers, sports complexes, and childcare centers.
South Korea Housing Index (in %)
However, in December 2021, the number of residential property sales in South Korea fell by 62% year on year to 53,774 – the lowest level for the month since 2008.
South Korean banks’ household loans also declined in December, marking the first month-on-month decline for any December since 2004. This is on back of the tight lending rules and the three rate hikes by the central bank.
Source of charts: tradingeconomics.com