Although the US and South Korea are likely to establish a working group to explore the deployment of the THAAD missile defence system in the latter country, Seoul is likely to postpone the actual introduction of THAAD, owing to Chinese opposition and concerns about a regional arms race. With parliamentary elections due on April 13, conservative South Korean politicians are likely talking up THAAD to bolster their support.
South Korea's 2015 real GDP growth came in at 2.6%, slightly higher than our forecast of 2.4%. We maintain our real GDP forecast for 2016 at 2.8% due to our expectations for only a modest pickup in economic momentum. High levels of household debt will undermine the government's plans to drive growth through domestic demand, while external demand is likely to remain weak due to the slowdown in the Chinese economy.
South Korea's stimulus package aimed at supporting growth by aiding exports and boosting domestic spending will have a limited effect on the country's growth, which will continue to be hampered by stiff export headwinds as well as high levels of household debt. With the stimulus mostly coming from policy bank lending, it is unlikely to have a significant impact on the government's 2016 fiscal deficit. However, we expect the central bank to cut interest rates to lend support to the government's initiatives, and now forecast a 25bps cut to 1.25% over the coming months.
The BoK kept its base rate steady at 1.50% following its February 16 monetary policy meeting, but we retain our forecast for the central bank to cut its base rate by 25bps to 1.25% over the coming months to support exports and the government's fiscal stimulus measures.
The South Korean won will weaken against the US dollar in the near term due to falling real interest rate expectations amid growing external headwinds and still subdued domestic demand. Accordingly, we have downgraded our 2016 end year KRW forecast to KRW1,270/USD from KRW1,200/USD previously. Over the long term, depreciatory pressures will be capped owing to a strong current surplus and large foreign exchange reserves, which reflect the won's slight undervaluation against the USD.
Major Forecast Changes
We have downgraded our 2016 end year KRW forecast to KRW1,270/USD from KRW1,200/USD previously to reflect falling real interest rate expectations amid growing external headwinds and still subdued domestic demand.
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||1,410.3||1,353.9||1,273.8||1,342.7|
|Real GDP growth, % y-o-y||3.3||2.4||2.8||3.4|
|Consumer price inflation, % y-o-y, eop||0.8||1.3||1.8||2.0|
|Exchange rate KRW/USD, eop||1,090.98||1,175.06||1,270.00||1,240.00|
|Budget balance, % of GDP||0.6||-2.4||-2.9||-2.4|
|Current account balance, % of GDP||6.3||8.0||8.8||8.6|
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