Investors have much to mull over as voting day approaches.
Winds of change are expected in South Korea
At 46th in Euromoney’s global risk rankings of 174 countries, South Korea is a moderate, high-ranking tier-three risk on a par with Bermuda and Dominican Republic.
That seems unlikely to change in the short term, with the economy improving again, underpinned by private consumption and exports. The OECD is predicting 3% real-terms GDP growth for this year and 2.7% for 2023.
Even so, the country has lost its lustre steadily over time. Its total risk score is down more than any of Asia’s top-10 safest options on a 10-year trend basis, and it was one of the countries marked down in 2021 despite a small bounce towards the end of the year.
On March 9, the country will go to the polls to elect a new president for a single five-year term, with a competitive contest expected between the candidates representing, on the one hand, the incumbent and progressive Democratic Party (DP), and on the other, the main opposition and conservative People Power Party (PPP). None of the other election hopefuls are anywhere near the level required to cause an upset.
Lee Jae-myung, a retired civil rights lawyer and former governor of Gyeonggi Province, is the DP candidate to replace Moon Jae-In, whose term is expiring. Standing on the PPP ticket is former prosecutor-general Yoon Suk-yul.
Euromoney survey contributor David Hyun Su Shin, credit risk manager at the Korea National Pension Service, believes the opposition candidate is more likely to win. If he does, policies will be more free-market, pro-American and corporate-oriented.
Such a fiscal policy will not cause problems for the country right away, but it is a very unsettling factor from a long-term perspective- Hyun Hak Kim, Kookmin University
Neither candidate is seen as a great hope for voters’ concerns about housing, household debt and inflation, however, after engrossing themselves in personal attacks on one another.
Success may hinge on which candidate (or their families) can avoid becoming mired in corruption scandals. Both have agreed to official probes into their own allegations. Yoon is accused of political meddling during his time as prosecutor-general, while the accusations against Lee involve a land development scandal in Gyeonggi.
Invariably South Korea’s corruption indicator was marked down in 2021. It is also the lowest-scoring of the six political risk factors in Euromoney’s survey, with the country lagging Japan, Singapore and Taiwan in that regard.
But while corruption is certainly a factor for investors to at least consider – along with the make-up of parliament, which has a bearing on policymaking – there are many other critical issues to consider.
As some of Euromoney’s expert contributors mentioned, and Foreign Policy also recently outlined, there are dividing lines between the candidates on a range of concerns that go beyond dealing specifically with North Korea.
They include how to handle China, whether or not to pursue a seat at the Quadrilateral Security Dialogue involving Australia, India, Japan and the US, and other problems to do with energy, the climate and labour unions for example.
Hyun Hak Kim, associate professor in the department of economics at Kookmin University, says that Lee is promising a substantial subsidy policy; if elected, a huge fiscal deficit could be expected as a result.
“Considering South Korea's basic physical strength, such a fiscal policy will not cause problems for the country right away, but it is a very unsettling factor from a long-term perspective," says Kim.
“In particular, no matter who is elected president, reform of the national pension is necessary. With South Korea's fertility rate declining at the fastest rate in the world, the population will begin to shrink as the national pension fund is expected to bottom out before 2050”.
Note in that respect the very low score for demographics in Euromoney’s risk survey shown in the chart.
Few experts will be making any big changes to their scores, however, and certainly not before the elections are held.
Some have suggested that positive factors – such as improving exports – are counterbalancing the negatives in political risk, household consumption and debts, and for that reason the country should retain its current standing.
Shin also notes that the exchange rate will be affected by related external risk trends, such as US inflation, international commodity prices, the Chinese economy, investment capital movement and domestic corporate earnings based on the semiconductor business cycle.
One thing is certain: South Korea will have a new leader in just a few weeks’ time. What is less clear is the path the country will take and how it will be affected by factors beyond its control.