Country Report South Korea August 2008

Outlook for 2008-09

• The Grand National Party (GNP) will control parliament until June 2012, but its majority is slim. The president, Lee Myung-bak of the GNP, will try to broaden his political base by unifying rival conservative forces.
• Protests against imports of US beef, although dying down since July, have undermined Lee Myung-bak's credibility. The Economist Intelligence Unit believes that he will now have to slow his planned economic reforms.
• There were protests during a visit to South Korea by the US president, George W Bush, in early August. Such public signs of hostility to the US could damages bilateral ties. Relations with North Korea will remain fraught.
• On August 7th the Bank of Korea (BOK, the central bank) raised the target for its key policy interest rate by 25 basis points, to 5.25%. The rate will remain at 5.25% until 2009, as the BOK waits to see the impact on prices of its decision.
• In June consumer price inflation reached 5.9% year on year, the highest rate since November 1998. This has prompted us to revise up our annual inflation forecast for 2008 to 4.8%, from 4.2% previously.

Monthly review

• In an effort to improve his popularity, in early June Lee Myung-bak carried out a cabinet reshuffle. However, it did not involve any major changes.
• The National Assembly (parliament) convened on July 10th, more than a month after it was due to do so. The delay was largely the result of a boycott over the beef imports issue by the main centre-left party, the Democratic Party.
• The shooting of a South Korean during a holiday in North Korea has further damaged already frosty relations between the two countries, particularly as the North has refused to co-operate with South Korean investigators.
• Relations with Japan have also suffered in recent weeks, owing to the flare-up of an ongoing dispute relating to an islet that is located between the two countries.
• The government has revised down its real GDP forecast for 2008. It has blamed surging prices for commodities and the weakening global economy, which are damaging consumer confidence and reducing disposable incomes.
• Preliminary real GDP data show that the economy grew by 4.7% year on year in the second quarter of 2008, compared with 5.7% in the first quarter. Part of the reason for the slowdown is the rising level of household indebtedness.
• Foreign portfolio investors have been selling local stocks, partly because South Koreas stockmarket is highly liquid compared with other emerging markets, which is allowing them to realise their gains without disrupting the market.