Country Report South Korea April 2009

Outlook for 2009-10

• The president, Lee Myung-bak, will find it difficult to rebuild his popularity amid the global economic turmoil that is undermining the domestic economy and resulting in rising unemployment.
• The most immediate foreign policy challenge facing the government is deciding how to react to the testing of a long-range missile by North Korea. The launch has further damaged relations between the two states.
• The government's short-term focus will be on providing fiscal stimulus and loosening monetary policy to support the local economy.
• The Economist Intelligence Unit expects the Bank of Korea (BOK, the central bank) to continue to cut its main policy interest rate in 2009.
• We forecast that real GDP will contract by 10.1% in 2009 and 0.1% in 2010. Thedeteriorating financial and economic environment abroad will have a negative impact on all components of South Korea's GDP.
• As domestic demand weakens and international commodity prices fall, we expect inflationary pressures to ease. As a result, we forecast that consumer prices will rise by just 0.1% in 2009, before falling by 1.2% in 2010.
• The won is expected to depreciate from an average of W1,102:US$1 in 2008 to W1,480:US$1 in 2009, before appreciating to an average of W1,460.6:US$1.
• The value of both exports and imports will fall in 2009, but the trade balance is set to remain in surplus. The current account will record surpluses equivalent to 1.9% of GDP in 2009 and 2.4% in 2010.

Monthly review

• Five by-elections for seats in the National Assembly (parliament) on April 29th will give voters their first chance to express their political preferences in almost a year.
• The Ministry of Strategy and Finance has unveiled a W17.7trn (US$13bn) supplementary budget to support its expanding economic stimulus efforts.
• Policymakers are attempting to forestall a fully fledged financial crisis by pre-emptive recapitalisations of the country's large commercial banks.
• The BOK has halted, at least temporarily, its vigorous monetary loosening efforts after six consecutive interest rate cuts. The central bank left the benchmark rate unchanged in March at its record low of 2%.
• According to revised figures from the BOK, South Korea's GDP contracted by 5.1% quarter on quarter in the fourth quarter of 2008, after growing by just 0.2% in the third quarter.

Source: Country Report