The passing of South Korea's controversial history textbook law is unlikely to strengthen the opposition NPAD's position in the legislative elections that will be held in April 2016. While the NPAD has obtained a marginal victory by opposing the law, the heated debates between the party and the ruling Saenuri have demonstrated that both are more concerned with political showmanship while parliament has yet to pass the budget for 2016. This will accordingly weigh on both their performances in the legislative election that will be held in April 2016.
South Korea's Q315 real GDP grew by 2.6% y-o-y, reflecting a recovery from the previous quarter. Despite stronger growth, we have downgraded our forecast for 2015 real GDP growth to come in at 2.4% compared to 2.8% previously, as the recovery in the domestic economy will be insufficient to offset the slowdown in the external sector. We have also downgraded our real GDP forecast for 2016 to 2.8% from 3.0% previously, as external demand is likely to remain weak due to the slowdown in the Chinese economy.
The country's expansionary budget reflects the challenges the government faces as it tries to strike a balance between attaining its fiscal goals and supporting growth, and will result in short-term fiscal strain for the government.
In line with our expectations, the Bank of Korea (BoK) held its base rate at 1.50% during its monetary policy meeting on November 12. We forecast interest rates to remain on hold throughout 2015 and have pared back our rate hike expectations for 2016, forecasting rates to remain on hold instead. Stable inflation, a fragile domestic recovery, and continued external uncertainty will prompt the BoK to maintain its monetary stance in a bid to keep borrowing costs low over the near-term.
The Korean won will continue to experience depreciatory pressure against the US dollar in the near term amid external headwinds. Over the long term, a solid current account surplus and positive real interest rates will provide support to the won, limiting depreciatory pressures.
Major Forecast Changes
We have downgraded our forecast for 2015 and 2016 real GDP growth to come in at 2.4% and 2.8% respectively, compared to 2.8% and 3.0% previously.
We have pared back our rate hike expectations for 2016, forecasting rates to remain on hold instead.
Downside Risks To Economic Growth Forecast: Should we see a sharper-than-expected downturn in the global economy or even an implosion in South Korea's household debt market, we would certainly expect to see a substantial weakening in its exports sector, which, in turn may push the economy into a pronounced recession.
Political Risks Rising: An increasingly belligerent North Korea poses a latent security threat, and any nuclear test could lead to a flare up of tensions on the Korean peninsula.
|Nominal GDP, USDbn||1,305.9||1,410.3||1,313.0||1,321.6|
|Real GDP growth, % y-o-y||2.9||3.3||2.4||2.8|
|Consumer price inflation, % y-o-y, eop||1.1||0.8||1.2||1.8|
|Exchange rate KRW/USD, eop||1,049.80||1,090.98||1,200.00||1,225.00|
|Budget balance, % of GDP||1.0||0.6||-2.4||-2.8|
|Current account balance, % of GDP||5.4||6.3||6.8||7.0|
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