South Korean economy showing signs of strain

South Korean won banknotes and coins of various denominations.
South Korean won banknotes and coins of various denominations.PHOTO: BLOOMBERG

SEOUL • While investors in South Korea have shrugged off threats of war for years, limited but potentially telling signs of economic harm are starting to show as Pyongyang rattles nerves globally.

The government in Seoul still forecasts that gross domestic product will expand by a healthy 3 per cent this year. Yet, damage to tourism is clear, a surge in consumer confidence may be waning and policymakers have warned that geopolitical tension is not going away anytime soon.

South Korean Finance Minister Kim Dong Yeon said on Monday that as a "fundamental solution" to North Korea is hard, the effect on financial markets will not be short term and could have a negative impact on the economy.

Heightened geopolitical tension is partly responsible for the 40 per cent fall in the number of foreign tourists visiting South Korea in July, according to the Korea Tourism Organisation.

The biggest slump is in visitors from China, reflecting a ban on group tours by the government in Beijing over South Korea's decision to deploy a US missile defence shield. The loss in spending from fewer Chinese visitors between March and July is about US$4.7 billion (S$6.4 billion), according to Bloomberg estimates.

After rallying since South Korean President Moon Jae In took office in May, the consumer sentiment index lost its shine last month, though the gauge remains in positive territory.

As North Korea's provocations spill over into financial markets via increased volatility, the broader economy can get hurt by any pullback in consumer spending and business investment activities, said economist Chang Jae Chul of KB Investment & Securities in Seoul.

South Korea's credit rating has improved since the Asian financial crisis in the late 1990s, and now stands higher than safe-haven Japan from all three major rating agencies. S&P Global Ratings indicated on Monday that it is not likely to make any changes for now, and the outlook remains stable.

Foreign buying of South Korean securities has grown steadily this year despite missile and nuclear tests in the North.

Yesterday, the biggest foreign business group in South Korea said it supported a trade deal with the United States that was slammed by US President Donald Trump, who had said he would discuss possible withdrawal from the US-Korea Free Trade Agreement this week.

The American Chamber of Commerce in Korea, which serves about 700 businesses in South Korea, warned that withdrawing from the pact will have a "severe damaging effect on the economy" and lead to a deterioration of ties.

"Now is the time to further solidify the US-Korea alliance, given the continued provocation from North Korea," it said.


A version of this article appeared in the print edition of The Straits Times on September 06, 2017, with the headline 'S. Korean economy showing signs of strain'. Print Edition | Subscribe