People are reflected in a display showing market indices outside a brokerage in Tokyo, Japan. REUTERS/Thomas Peter/File Photo
People are reflected in a display showing market indices outside a brokerage in Tokyo, Japan. REUTERS/Thomas Peter/File Photo

South Korean shares surrendered yearly gains, the 10-year bond yield rose to 2%, and the won lost almost 2% against the dollar as legislators moved to vote on President Park Guen-hye’s impeachment for a personal adviser’s alleged influence-peddling. Leading chaebol conglomerates, including Samsung, SK, and Lotte were raided to uncover evidence of illegal contributions to her confidante’s foundations, as millions marched in Seoul for the President’s ouster with her popular opinion approval at 5%.

The scandal spread to the National Pension Service, the biggest institutional investor which has increased allocation to neighboring emerging markets. The government had just implemented new company payment limits for state employee hospitality as a symbolic victory in the original economic reform and modernization platform, which was diluted by continued consumer debt and shipping industry rescues. That agenda has now been indefinitely gutted as the administration tries to stay in power and win parliamentary approval for its budget and new cabinet appointments. Finance Minister Yoo Il-Ho warned of “contracted sentiment” from a combination of political, growth, and structural woes both at home and abroad, which have eliminated Korea’s recent safe haven status and invited urgent institutional and policy rebuilding parallels with the late 1990s crisis aftermath.

GDP growth was 2.7% in the third quarter, half a percent down from the previous period, with exports accounting for 40% of output, down 3% in October as in twenty past months. The Korea Institute for Industrial Economics and Trade predicts a similar 2.5% rate next year, with slight export rebound “offset by consumption and construction slowdown.” The rich country OECD does not foresee a return to 3% expansion until 2018, and emphasized the need for productivity and labor market advances with the aging population. For the next two years it puts Korea’s growth below the respective 3.3% and 3.6% global averages. President Park unveiled three consecutive budgets to boost domestic demand through infrastructure spending and mortgage loan refinancing, but the measures had only short-term effects and deficit creation has been ruled out. Monetary policy is equally frozen with the central bank benchmark rate at a record low 1.25% since June, as household debt continues to rise to over US$1 trillion with government borrowing aid and leaves the ratio to disposable income at 175%, the highest in the OECD.

Commercial banks are owed half the sum at US$600 billion, and October registered the biggest spike in debt since central bank data collection began in 2008. Local savings banks have jumped into personal as opposed to traditional small business lending, with the former reaching 40% of the total in the third quarter. These institutions have shied away from troubled electronics manufacturers engaged in product and pricing wars with regional competitors, and refused to participate in the recent US$6 billion bailout of Hanjin Shipping after its bankruptcy filing. New vessel orders have dropped 90% this year, and a special state-backed company will be Hanjin’s emergency funding source. Bank profits over US$2.5 billion in the latest quarter were mostly from cost-cutting on reported 2% substandard credit, but regulators in November ordered tighter provisions for residential property exposure in particular amid regular news coverage pointing to a bubble. Government control of the banking system has been strong since the late 1990s crash, with a US$2 billion 30% stake in Woori Bank just divested to a local private equity and life insurer consortium following repeated attempts.

The central bank announced a US$1 billion intervention to support the bond market as it also prepared for a signaled US Federal Reserve December interest rate hike, even before President-elect Trump reiterated a large-scale reflationary public works commitment. He also pledged to renegotiate the “disastrous” bilateral free-trade agreement and may brand Korea along with China as a “currency manipulator” triggering import sanctions, as both were criticized in the US Treasury Department’s latest monitoring report. On North Korea, his foreign policy team has taken a tough line, and as the impeachment saga unfolds President Park and her successor will no longer be able to settle for spiritual guidance in absorbing overdue commercial, debt and diplomatic pain.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.