South Korea

South Korea has historically exhibited solid economic growth rates, averaging +4.9% in the 2000s and +3.3% in the 2010s. The Covid-19 pandemic and the country’s stringent testing, tracing and isolating strategy led to a shallow full-year recession in 2020, with GDP contracting by -0.9%. 2021 saw a strong recovery (+4.0%) as the export-oriented economy benefited from strong external demand (especially in the electronics sector). This will remain a tailwind in 2022.

The pandemic marked a turning point in the country’s fiscal policy as it shifted from a rather conservative stance to a expansionary approach. In 2020, it registered the first fiscal deficit in a quarter of a century at -2.2% of GDP, followed by -2.9% in 2021. This is the result of pandemic relief (financial support to companies and households), but public investment in technology, digitalization, the manufacturing sector to boost competitiveness, electric vehicles and renewable energies will likely keep the fiscal balance in deficit in the coming years.

With respect to monetary policy, policy rate cuts and a financial stability plan amounting to 5.3% of GDP (comprised primarily of lending to SMEs and support to the banking system) were put in place to cushion the impact of the Covid-19 crisis. A normalization of the policy stance started in 2021 as the Bank of Korea (BOK) was among the first to start hiking policy rates in August 2021. The tightening path is likely to continue as the BOK aims to contain inflation and household debt.

South Korea ranked fifth in the 2020 World Bank Doing Business survey. It performed especially well on getting electricity and enforcing contracts (ranking second in both categories), but less so on getting credit and registering property. Policywise, the South Korean government wishes to reform corporate governance and rebalance the power of the chaebol (family-run conglomerates), as well as increase the resilience of local supply chains.

Though in majority in parliament since March 2020, the ruling liberal-leaning Minjoo party and its leader (and incumbent South Korea president), Moon Jae-In have substantially fallen in popularity in the wake of a corruption scandal. The opposition conservative party, rebranded as Power People Party (PPP) after its electoral defeat has, aside from capitalizing on its opponent’s woes, softened its hawkish stance on fiscal issues to align with the political landscape. This makes them more likely to win in the upcoming March 2022 presidential election. Such a scenario could imply slower policymaking, especially in areas such as labor market reforms and fiscal policy, given that Minjoo is likely to remain in control of the parliament until 2024.