A new year usually begins with expectations and resolutions, but a thick black cloud looms over the year’s prospects for the South Korean economy. External situations continue to worsen as the United States promises more key interest rate hikes while protectionist sentiments are growing globally. Meanwhile at home, economic damages caused by political risks are on the rise. The local economy was dealt a critical blow by the scandal involving President Park Geun-hye’s confidant Choi Soon-sil and the subsequent moves to impeach the president. Will the Korean economy be able to sail through the rough waves from home and abroad? Today, we’ll get an in-depth look into the projections and the tasks faced by the South Korean economy in the year 2017. First, Dr. Kim Chang-bae of the Korea Economic Research Institute shares with us a forecast for the Korean economy.

Researchers at the Korea Economic Research Institute forecast that the Korean economy will grow 2.1% this year. Last year’s growth rate was about 2.5%, so it’s about 0.4 percentage points lower by comparison. Last September we forecast that the economy would grow 2.2% in 2017, meaning the outlook has worsened since then. The Korean economy grew 2.6% in 2015, and about 2.5% in 2016. The growth rate is expected to contract further in 2017. We forecast that the growth rate will shrink first because of the major internal and external uncertainties. Another factor is that the country lacks policies that can prop up the economy when it is weak. Considering the fiscal sustainability problems, the country’s ability to enforce proactive financial policies has decreased, leading us to forecast a contracted growth.

The 2017 outlook for the Korean economy is bleak. Major domestic economic research institutes’ growth projections for the country’s economy range between 2.6% and 2.1%. The Organization for Economic Cooperation and Development (OECD) also lowered its growth projection for the country from 3% to 2.6%, adding to the alarm. For the South Korean economy, a growth rate in the 3% range indicates that everything is on track. But the local economy seems set to face more difficulties this year than it did in 2016. The shocks it faced last year, such as Britain’s departure from the European Union, the United State’s presidential election results, and the political situation at home, had all been mere preludes.

In short, it’s an uncertain world. Many unexpected and unpredictable events, such as Brexit and Donald Trump’s election victory, took place last year. Chaotic political situations keep cropping up. Everything has a question mark. You could say that these question marks started to show up in 2016, and they are expected to grow bigger in 2017. The question marks are what we call “uncertainties,” and we live in an era where these uncertainties are accelerating.

Professor Kim Kwang-seok of the Graduate School of International Studies at Hanyang University defines this year as “the era of uncertainty.” At home, the constitutional court’s decision to begin the impeachment trial of President Park Geun-hye, the special prosecutors’ investigation into the so-called Choi Soon-sil Gate, and the upcoming presidential election are set to affect the country’s household and corporate economies one after another. Meanwhile externally the incoming Donald Trump administration in the U.S. with its protectionist ideas could cause some other issues for South Korea.

When Donald Trump is inaugurated on January 20, the global economy may become somewhat destabilized due to his strong protectionist policies and other hostile economic policies that antagonize China. When this happens, it won’t be just the financial market that becomes insecure, but the real economy such as exports would face rising uncertainties as well. Businesses will hold back from making investments, and households will tighten their wallets due to contracted consumer sentiments. In a nutshell, this is the “Trump Risk,” and the Trump Risk is likely to become the biggest problem for the South Korean economy in 2017.

Last year, the U.S. selected the republican candidate Donald Trump as the nation’s 45th president. Trump promised to encourage individual and corporate investments by offering bold tax cuts, to rebuild aged and worn-out infrastructures like roads and bridges in another “New Deal”, and also pledged to revive the manufacturing industry and promote protectionism.

☛ < 효과 1 >
“(남 기자) 23초 3억 6천만 미국인의 선택은 공화당 도널드 트럼프였습니다. 트럼프는 막말 논란 등 각종 악재에도 불구하고 민주당 힐러리 클린턴을 꺾고 45대 대통령에 당선됐습니다... ” http://news.kbs.co.kr/news/view.do?ncd=3375226
-> 美 대선 ‘이변’…트럼프 대통령 당선 ( 9시 뉴스 )

President-elect Donald Trump pledged to “make America great again,” and now all over the world, eyes are on the U.S. policy direction that will take form on January 20, when Trump takes office. If the U.S. sticks to Trump’s pledges to strengthen protectionist policies and slap high tariffs on imports in a move targeting China, the ripple effect will have a direct influence on Korea’s real economy. To make matters worse, the U.S. is also poised to continuously hike up its key interest rate, further raising concerns for the Korean economy.

Korea will not raise its benchmark interest rate just because the U.S. does. The key interest rate can only be raised and normalized once the stimulus measures are found effective, price stabilization has been reached and the growth rate has been taken into account. Economic stimulus remains a more important task for Korea at the moment. The U.S. rate hike is a cause for concern because of the potential fund leakage that may result from the discrepancy between the key interest rates of the U.S. and Korea. However, the slowing economy is a bigger problem for Korea and so it will have to try to keep its interest rate frozen in order to escape from the economic doldrums. If Korea is forced to hike up the rate due to accelerated fund leakage, the real estate market will slump even further to threaten the household economy, and in the end intensify the severity of the country’s household debt problem.

As pointed out by Professor Kim Kwang-seok, the aftershock of the U.S. benchmark interest rate increase will be formidable. The first obstacle the Korean economy will face is the household debt amounting to 1,300 trillion won. The economic sentiments are already bleak, so an increase in the debt burden will aggravate the economic recession even further. Moreover, it could also lead to the so-called “exodus” of foreign funds invested in the markets of emerging economies, including Korea. The problem is the current state of Korea’s politics.

☛ < 효과 2 >
“22초 (정세균 국회의장) 대통령 박근혜 탄핵소추안은 가결되었음을 선포합니다.
+ (김관영 국민의당 의원) 박 대통령에 대한 탄핵 소추는 손상된 헌법 질서의 회복을 위한 첫 걸음이자, 민주주의 복원을 위한 대장정의 시작입니다.”
-> 찬성표 234표…박근혜 대통령 탄핵안 가결 ( 9시 뉴스 )

All systems are operating normally despite the presidential impeachment process. However, if the political unrest persists, Korea’s economy will enter a difficult phase.

I think there will be two major issues. The first one is undoubtedly the political unrest. The political unrest triggered by the Choi Soon-sil gate is likely to cause an early presidential election, diminishing policy momentum. The second issue is the real estate market. The real estate market is at the core of the Korean economy, closely linked to household debt, construction investment and so on. But the real estate market is beginning to falter. It will be fine if the fall takes place gradually, but if it becomes a rapid fall, it could push the overall economy into a rapid downward spiral. So I believe that these two issues – the political unrest and the real estate market’s descent – are the biggest problems for the Korean economy in 2017.

As projected by Dr. Kim Chang-bae of the Korea Economic Research Institute, political unrest stalls policy momentum, causes household spending and business investments to shrink, slows down structural reforms, and restricts crisis management. If the real estate market slows down in such a situation, housing prices will fall while the key interest rate goes up, setting the stage for a catastrophe as big as the 2008 global financial crisis, if not bigger. However, there is hope.

First, the strength of the people displayed during the political unrest may play a positive role in promoting more transparent government policies. Also, the price of oil is on the rise. Considering Korea’s industrial structure with a high proportion of petrochemical businesses and its significant proportion of exports to oil producing nations, the oil price increase may be a glimmer of hope for the Korean economy in 2017, as long as the price remains below 60 dollars per barrel.

If the people’s strength seen during the candle-lit rallies can lead structural reforms, Korea will be able to rid itself of corruption and sever the links between business and politics. Government operation guaranteeing individuals’ creativity and freedom of businesses will be possible as well. In addition, if the international oil price remains at the 55 dollars per barrel level as widely expected, the petrochemical industry previously hit hard by the low oil price will be able to escape the slump. If the economies of the oil rich emerging nations are revitalized, Korea will see its exports rise and the overseas construction, shipbuilding and offshore plant deals revived. Positive changes could be expected in the Korean financial sector as well.

The acceleration and innovation of the FinTech industry is a positive element. Many startups entered the FinTech industry throughout 2016, while major financial companies expanded their investments in IT. Information and communications technology (ICT) companies also made bold steps into the FinTech industry. Also, internet banks, such as K-bank, are expected to be accredited in January 2017, followed by Kakao Bank. In the process, the FinTech industry will boom, creating another support beam to prop up the nation’s economy.

Hope for the FinTech field, as explained by Professor Kim Kwang-seok, emerged last year.

☛ < 효과 3 >
“1초 (여 앵커) 국내 제1호 인터넷 전문은행이... 출범할 전망입니다. 금융위원회는 오늘 인터넷 전문은행 출범을 준비하고 있는 K뱅크 준비법인이 본인가 신청서를 제출했다고 밝혔습니다.” http://news.kbs.co.kr/news/view.do?ncd=3353806
-> 국내 1호 인터넷은행 ‘K뱅크’ 본인가 신청 ( 뉴스 5 2016.09.30 )

Internet banks created by banks, IT firms and communication companies signaled a change in the financial industry, heralding the beginning of the era of FinTech. FinTech, including the mobile payment market that grows by an average of 43% on year, is a new opportunity for the Korean economy. With the nation’s strength in the IT field, it will have no problem standing out in the FinTech industry, which is an axis of Industry 4.0. The development of the FinTech industry will provide Korea with a springboard into the area where all information is linked via networks – from Internet of Things to smart cars, bio industry and artificial intelligence. Risks and threats may be everywhere in 2017, but hope is also amongst them. What kind of decisions should Korea make for the year?

First and foremost 2017 is a year of politics. The presidential election is this year, and the current political unrest may also be expanded. So the important thing is to prevent political problems from influencing the economy. Also in terms of economic policies, since the monetary policy will have to be tightened in order to raise the key interest rate down the road, we’re only left with the budgetary policies to rely on. If the economy continues to contract, the government should get ready to be more proactive with its finances.

The Korean economy’s keyword for the year is risk management. The nation must acquire a full understanding of the current economic situation and completely separate politics from business. At the same time, Korea should find a path amidst the risks using various fiscal policies, such as an early execution of the budget set last year, and start discussions regarding a supplementary budget.