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South Korea Country Risk Report Q1 2019

South Korea Country Risk Report Q1 2019

We are revising down our forecast for South Korea's real GDP growth in 2018 and 2019 from 2 7% to 2 5% and 2 7% to 2 3% respectively We expect the uncertain global trade environment to weigh on exports and capital investment, while private consumption will be negatively impacted by a weak labour market and high household debt

We are revising our forecast for the Bank of Korea (BoK) to hike its base rate by 25bps to 1 75% for the remainder of 2018 and to 2 00% for 2019 (versus 1 50% and 1 75% previously Our view is due to hawkish signals from the BoK, as it shifts its emphasis to ensuring financial stability over growth, and rising inflationary pressures

We expect South Korea's fiscal surplus to come under pressure due to lower tax revenue collection due to the country's weak business outlook and a rise in expenditure growth stemming from increased welfare support We are thus revising down our forecast for South Korea's fiscal surplus as a share of GDP in 2019 to 0 6% from 0 8% previously

We are revising our average forecast weaker for the South Korean won in 2018 to KRW1,130/USD from KRW1,070/USD previously due to a bearish technical trend and narrowing real interest rate differentials between South Korea and the US In addition, we are also revising our 2019 forecast to KRW1,150/USD from KRW1,050/USD due to the currency's overvaluation and our expectations for weak economic growth

We expect South Korea's policymaking environment to be more challenging over the coming quarters ahead of the 2020 legislative elections, with the opposi-tion emboldened by President Moon Jae-In's falling approval scores amid a weakening economic environment Major Forecast Changes

We have revised our 2018 and 2019 real GDP forecast downward to 2 5% and 2 3% from 2 7% and 2 5% respectively to reflect ongoing uncertainty in the global trade environment and a negative employment outlook

We have revised our 2018 real interest rate forecast and now expect one rate hike of 25bps, up from the previous forecast of a rate hold at 1 50%

Key Risks Downside Risks To Economic Growth Forecast: The ongoing US-China trade conflict may still escalate further into a full-blown trade war This would have an adverse effect on South Korean exports and the country's economy at large, given how integrated it is with China's supply chain Political Risks Rising: President Moon Jae-In risks becoming a lame duck president as his approval score falls In addition, North Korea poses a latent security threat, and any nuclear test could lead to a flare up of tensions on the Korean peninsula South Korea Country Risk Q1 2019


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic – SWOT Analysis
Political – SWOT Analysis
Economic Outlook
Economic Growth Outlook
South Korea's Growth To Continue Disappointing In 2019
GDP By Expenditure Outlook
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: GDP GROWTH FORECASTS
Outlook On External Position
TABLE: MAIN IMPORT AND EXPORT PRODUCTS
TABLE: MAIN IMPORT AND EXPORT PARTNERS
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
Monetary Policy
Bank Of Korea To Tighten As Focus Shifts To Financial Stability
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
South Korea's 2019 Budget: Continued Emphasis On Job Creation And Social Welfare
TABLE: KEY BUDGET INITIATIVES
Structural Fiscal Position
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
TABLE: MAIN SOURCES OF REVENUE AND EXPENDITURE
South Korea Country Risk Q1 2019THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report are solely derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings’ analysts do not share data or information with Fitch Solutions Macro Research.ContentsCurrency Forecast
South Korean Won To Face Modest Depreciatory Trajectory
TABLE: CURRENCY FORECAST
10-Year Forecast
The South Korean Economy To 2027
Slower Growth To 2027
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Political Outlook
South Korea Domestic Politics
South Korea's Moon Administration To Face Increased Policy Making Challenges
TABLE: POLITICAL OVERVIEW
South Korea Long-Term Political Outlook
South Korea To Remain Stable Despite Fragmented Political Landscape
TABLE: NORTH KOREA GDP ESTIMATES
North Korea Domestic Politics
Contrarian View: What If North Korea Denuclearises?
TABLE: TIMELINE OF KEY EVENTS AFFECTING KOREAN PENINSULA OVER NEXT FIVE YEARS
Operational Risk
TABLE: OPERATIONAL RISK
Economic Openness
TABLE: FREE TRADE AGREEMENTS
TABLE: TARIFF AND NON-TARIFF TRADE BARRIERS
TABLE: FREE TRADE ZONES AND INVESTMENT INCENTIVES
TABLE: BARRIERS TO FDI
Market Size and Utilities
TABLE: ELECTRICITY RISKS
TABLE: FUEL RISKS
TABLE: TELECOMMUNICATIONS RISKS
TABLE: WATER RISKS
Global Macro Outlook
Continued Growth Divergence And Policy Risks Ahead
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % y-o-y
Index Tables
TABLE: SOUTH KOREA – MACROECONOMIC DATA AND FORECASTS

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