South Korea Country Risk Report & Analysis

Economic structure to remain sound despite rising global headwinds

LOW RISK for enterprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Last updated in January 2025.

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Form of state	Presidential Republic
Head of government	Yoon Suk-Yeol (President)
Next elections	2027, presidential

Strengths & Weaknesses

Advanced economy with high per capita income
Sound financial sector
Solid external position (low external debt, ample foreign exchange reserves, etc.)
Strong business environment
Firmly established democracy

Geopolitical risk (stemming from North Korea)
Economic vulnerabilities due to dependency on external demand
Elevated household debt
Slowly improving but still weak corporate governance
Aging population

Economic Overview

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Stable economic growth

South Korea is a major Asian economy, recognized for its thriving industrial sector and electronics exports. Its rapid economic development (one of the fastest rates seen over the past decades) earned it the title of "Asian tiger". The economy is strong and modern, with sound finances and an educated and skilled workforce. However, its aging population and stance against immigration raise concerns about future economic activity.

South Korea has historically exhibited solid economic growth rates, averaging +4.9% in the 2000s and +3.5% in the 2010s. The Covid-19 pandemic led to a shallow full-year recession in 2020, with GDP contracting by just -0.7%. The recovery thereafter was forceful (+4.6% in 2021), before a moderation in growth to +2.7% in 2022 and +1.4% in 2023, in particular in the context of weakening external demand and a downturn in the electronics cycle. GDP growth firmed up in 2024, driven by a recovery in global trade and the electronics cycle, real household income growth and monetary easing by the Bank of Korea (BoK). Some of these tailwinds should remain in the short-term, but risks are likely on the downside, in the context of geopolitical tensions, higher trade tariffs imposed by the US and domestic political uncertainty. We expect GDP growth to settle at +2.1% in 2025 and 2026.

Inflation in South Korea declined from 5.1% in 2022 to 3.6% in 2023, remaining significantly lower than the OECD average. Inflation eased further to an estimated 2.2% in 2024 and is expected to stabilize at 1.9% in 2025 and 2% in 2026. This should allow the BoK to extend its monetary easing cycle that started in 2024 into 2025-2026.

Solid public and external finances, watch out for household debt

Following a quarter of a century of positive budget balances, South Korea has registered annual fiscal deficits since 2020, albeit comparatively small ones (around -1% of GDP on average). Narrow fiscal deficits are expected to remain the norm in the coming years. The government wants to focus on deregulation and tax cuts to boost private-sector investment and employment, notably to promote research and development in the semiconductors, batteries and AI industries. South Korea’s public debt rose from 40% of GDP in 2019 to almost 53% in 2024 but is forecast to remain below 60% in the next few years, a still favorable ratio compared to the OECD average that is approaching 100%.

The real issue to monitor is household debt, which amounted to 105% of GDP in 2023, mainly in the form of mortgages, and makes the economy sensitive to interest rate changes. In Q1 2024, the ratio fell below 100% for the first in over three years, thanks to a strengthening of macroprudential policies and a slowdown in housing market prices. Moreover, financial risks overall are largely contained, given a robust and closely regulated financial system and sufficiently capitalized banks. Another important concern is the aging population, a structural threat to the South Korean economy. With the world’s lowest fertility rate – 0.72 children per woman in 2023 – the median age of the population is rapidly rising, reaching 45 years in 2024, adding pressure on pensions, health and social care, and setting the stage for harsh labor reforms.

South Korea’s external position is favorable in the short-term but the economy may face some medium-term challenges. The current account balance has posted continued annual surpluses since 1998, even during the Great Financial Crisis and the Covid-19 crisis. It dropped to +1.4% of GDP in 2022 due to rising energy import prices but is expected to recover to around +4% of GDP across 2025-2026. Vulnerability stems from a concentration in shipments: exports are mainly in the electronics sectors and China (20% of exports in 2023) and the US (18% of exports in 2023) remain the dominant destinations. In a context of growing geopolitical tensions, this jeopardizes the medium-term stability of the country’s exports.

South Korea’s gross external debt is comparatively low at less than 40% of GDP and that ratio is expected to decline in the coming years. Moreover, the country is a net external creditor.

Business environment and political developments

South Korea exhibits a strong business environment. The Heritage Foundation’s Index of Economic Freedom survey of 2023 ranks it 15th in the world for doing business and 5th in Asia. It performs especially well with regards to fiscal health, property rights, business freedom, government spending, monetary freedom and judicial effectiveness, while the labor freedom, financial freedom, investment freedom and tax burden perform relatively less well. The World Bank Institute’s annual Worldwide Governance Indicators surveys regularly assign South Korea strong scores for its regulatory and legal frameworks, though the level of perceived corruption has some room for improvement. Our proprietary Environmental Sustainability Index ranks South Korea 88th in 2024, reflecting good resilience to climate change and favorable ratios for energy use and CO2 emissions per GDP. Yet, the renewable electricity output is very low, so the government’s efforts to develop offshore wind power will need to be monitored.

South Korea is currently dealing with an impeachment process against President Yoon Suk-Yeol (from the currently ruling People Power Party), following his failed attempt to implement emergency martial law in December 2024. The first half of 2025 is thus likely to be marked by political uncertainty, before an early presidential election likely produces a president from current opposition Minjoo. This would realign the executive power with the parliamentary majority, potentially improving policymaking. Beyond the ongoing short-term uncertainties, South Korea hovers around the 22nd place in the Economist Intelligence Unit’s Democracy Index and is described as a “full democracy”. Meanwhile, relations with North Korea are not expected to improve, in part as the latter aims to further develop strategic weapons and given the context of still simmering tensions between China and the US.

Trade Structure by destination/origin

(% of total, 2023)

Trade Structure by product

(% of total, annual 2023)

Contacts

Françoise Huang

Senior Economist for Asia Pacific

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