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The economy will continue to grow at a moderate pace in 2016. Modest gains in consumer
spending and a healthy labour market drive the economy. Additional support comes from
construction investment. Exports, which make up almost two-fifths of GDP, are performing
poorly. Uncertain political developments in North Korea and the continued drag of China's
economic slowdown are other constraints. Annual rates of growth in real GDP should average
about 2.6% during the remainder of this decade.
KEY POINTS
Faced with a number of constraints, the economy is performing sluggishly. Real GDP will
rise by 2.5% in 2016, after gains of 2.6% in 2015.
Concerned about external conditions, firms are hesitant to boost investment. Meanwhile,
public investment will rise by less than 1% in 2016.
Private final consumption (in real terms) rose by 2.4% in 2015 and growth of 2.3% is
expected in 2016. Korea's household debt is one of the economy's main weaknesses,
amounting to more than 160% of household income.
Annual rates of growth in real GDP should average about 2.6% during the remainder of this
decade. A gradual recovery in trade should boost exports and investment in the medium
term, Labour productivity has been growing but is still just 55% of the average among the
larger OECD countries.
FACTS
Area
97,400 square kilometres
Currency
Won (1 won = 100 jeon)
Location
The Republic of Korea (South Korea) is located about 500 kilometres off the coast of
mainland China, and forms the entire southern half of the Korean peninsula. There are many
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hundreds of small islands to the south, most of them uninhabited. The territory is mixed in
character, with considerable mountainous areas. Consequently, most of the largest
settlements are on the southern and eastern coasts.
Capital
Seoul
GOVERNMENT
Head of State
Park Geun-hye (2012)
Head of Government
Hwang Kyo-ahn (2015)
Ruling Party
The Saenuri Party (GNP) leads the government.
Political Structure
South Korea has a prime minister but real power lies with the executive president. The
National Assembly has 300 members, elected for a four-year term, 244 members in two-seat
constituencies and 56 members by proportional representation.
Last Elections
Elections to the National Assembly were held in April 2016. The Minjoo Party took 123 seats,
the ruling Saenuri Party won 122 seats, the Peoples' Party won 38 seats and the Justice
Party received six seats. Independents took the remaining seats. In December 2012, Park
Geun-hye of the Grand National Party won the presidency, defeating Moon Jae-in. She
received 52% of the vote while Moon Jae-in received 48.0%. Prime minister Lee Wan Koo
resigned in April after facing charges of corruption. Hwang Kyo-ahn was approved as a new
Prime minister in June.
International Issues
South Korea has announced an expanded air defence zone, which will now partially overlap
with a similar zone announced by China. The two zones will now both include a rock claimed
by both countries and controlled by South Korea.
Tensions with North Korea have greatly escalated after Pyongyang breached international
sanctions by testing a nuclear bomb and launching a long-range rocket. In response, Seoul
closed a large industrial park that is financed by South Korean capital and employs 54,000
North Korean workers. South Korea and Japan have a dispute over three tiny islands in the
Sea of Japan, known by Koreans as Dokdo and by Japanese as Takeshima. The islands are
controlled by South Korea.
Government Finance
In 2014, Seoul launched a stimulus programme, boosting state spending by 5.7%. The move
pushed the deficit up to 2.1% of GDP. In 2015, Seoul announced another US$9 billion
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supplementary budget to help its struggling economy cope with the effects of Mers. These
decisions pushed the deficit to 3.0% of GDP. A deficit equal to about 2.3% of GDP is
expected in 2016 though another stimulus could be launched sometime during the year.
Seoul projects continuing deficits through 2019.
With the government running fiscal deficits every year since 2008, public debt has steadily
risen. Public debt in 2015 amounted to Won559,792 billion or 35.9% of GDP. In real terms,
public debt rose by 6.6% in 2015. The 2016 budget will boost public spending, raising public
debt to more than 40% of GDP.
Spending on social security and welfare accounted for 24.2% of government expenditure in
2015 followed by spending on general public services (20.2%).
Chart 2 Public Debt: 2010-2015
ECONOMY
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economy has continued to expand sluggishly in more recent years as exporters struggled and
growth of domestic demand remained weak. A fiscal stimulus helped to boost growth in
2015.
Inflows of FDI have been gradually trending downward. One reason is that China, Taiwan
and Japan have been all able to attract funds previously destined for Korea. Another is that
the government has made little headway in its attempts to deregulate markets. A rapidly
ageing population threatens to slow economic progress in the longer term.
Foreign Trade
The export dependency of South Korea's economy has increased over time. In 2015, exports
represented 38.2% of GDP. The dollar value of exports fell by 8.0% in 2015 and another
decline of 7.8% is forecast for 2016. A fall in the value of the won should eventually provide
some support to exporters. Korea, however, is the world's largest exporter to China - and
therefore the most exposed to China's slowdown.
Exports of machinery and electrical equipment accounted for 34.6% of the total and exports
of transportation including cars accounted for 19.9% of the total in 2015. China, USA and
the EU were South Korea's main export markets, accounting for 48.5% of the country's
overseas sales in 2015.
South Korea has concluded free-trade agreements (FTAs) with at least 45 countries and
expects negotiations with China and Vietnam to be concluded soon. If all these agreements
come into effect, South Korea will be engaged in free trade with economies representing
more than 70% of the global economy. However, the country has been excluded from
becoming a founding member of the Trans-Pacific Partnership (TPP) and fears that the new
trade pact will give rival exporters an advantage in key markets such as Japan.
The current account surplus was 7.7% of GDP in 2015 and it will widen to 8.1% in 2016.
Chart 3 Total Foreign Trade: 2010-2015
Economic Prospects
Real GDP will rise by 2.5% in 2016, after gains of 2.6% in 2015. Modest gains in consumer
spending and a healthy labour market drive the economy. Additional support comes from
construction investment. Exports, which make up almost two-fifths of GDP, are performing
poorly. Uncertain political developments in North Korea and the continued drag of China's
economic slowdown are other constraints. GDP grew by 0.7% quarter-on-quarter in the April
to June period.
Inflation was 0.7% in 2015 and prices will rise by 0.9% in 2016. The central bank's target
range is 2-4%.
Concerned about external conditions, firms are hesitant to boost investment. Meanwhile,
public investment will rise by less than 1% in 2016.
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Real estate accounts for almost 75% of household assets in South Korea - a far greater
share than in most industrialised countries. Seoul spent US$20 billion in 2015 to help
homeowners switch to fixed-rate, amortised mortgages (which the government considers
more stable than floating-rate loans). The country's ageing population could soon begin to
exert downward pressure on house prices.
Private final consumption (in real terms) rose by 2.4% in 2015 and growth of 2.3% is
expected in 2016. Korea's household debt is one of the economy's main weaknesses,
amounting to more than 160% of household income. This debt weighs heavily on consumer
spending. Together, low rates of inflation, the decline in oil prices and increased spending as
a result of the fiscal stimulus provide modest support for consumption.
The jobless rate was 3.6% in 2015 and it will increase to 3.7% in 2016. However, youth
unemployment has risen to 12.5%. The low number of unemployed is deceiving since Korea's
birth rate and its female workforce participation rate are both among the lowest in the
world. Labour productivity is only about two-thirds of the OECD average and around half
that of the US. Mass lay-offs have resulted from the government-led corporate restructuring
in the shipping and shipbuilding industry.
Chart 4 Real GDP Growth: 2010-2016
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BUSINESS ENVIRONMENT
The government continues to exert significant control in key sectors. Korea's large familyowned conglomerates (known as chaebol) also have a disproportionate degree of influence.
New tax incentives to discourage cash hoarding by chaebol are forcing many of these firms
to concede to investor demands to boost dividends.
Officials are stepping up their efforts to reform Korea's labour market. A host of reforms are
planned including an overhaul of the seniority-based wage structure and greater protection
for temporary workers. Seoul wants to reduce working hours to create more jobs. Officials
hope to spur demand by temporarily reducing taxes on automobiles and durable consumer
goods.
Korea plans to reduce the tax burden on service industries and increase funding for startups in an effort to spur innovation. Investors in innovation also receive generous tax
incentives while highly skilled foreigners are offered entrepreneur visas to start businesses.
The government estimates that its measures will ultimately unlock Won4.3 trillion in funding.
The privatisation programme has moved at a slower pace than originally planned, due in part
to strong opposition from labour unions and delays in passing legislation. However, the
present government has made restructuring a higher priority. At Seoul's urging, the staterun Korea Development Bank intends to sell 91 of its 118 non-financial units in 2016-2019.
Table 1 Indicators of Business Environment: 2016
Ease of Doing Business Rank (out of 189)
Starting a Business
Time (days)
Procedures (number)
28
Procedures (number)
10
Getting Electricity
Time (days)
18
39.8
Registering Property
Time (days)
6.5
5.1
Employing Workers
Paid annual leave for a worker with 1 year of tenure (in working days)
15
Tax Rate
Total tax rate (% profit)
33.2
13.8
188
12
VAT (%)
10
Exporting
Time to export: Border Compliance (hours)
14
185
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Importing
Time to import: Border Compliance (hours)
315
7.3
Resolving Insolvency
Time (years)
1.5
Cost (% of estate)
3.5
Getting Credit
Strength of legal rights index (0-12)
Enforcing Contracts
Time (days)
230
Cost (% of claim)
10.3
Note: Data is sourced from the World Bank's Doing Business 2016. Doing Business presents
quantitative indicators on business regulations and the protection of property rights - and
their effect on businesses, especially small and medium-size domestic firms. The data for all
sets of indicators in Doing Business 2016 are from June 2014 until June 2015 (except for
paying taxes data which refers to January-December 2014). Rankings are based on data
sets across 189 countries.
ENERGY
With no domestic reserves, South Korea must import all of its crude oil. The country has
some of the largest and the most advanced oil refineries in the world.
The government has both a short-term and a long-term approach to fulfilling its oil needs. In
the short term, it has developed a strategic petroleum reserve. Strategic stocks are roughly
equivalent to a 90-day supply, and are expanded in proportion to consumption levels. Nearly
75% of oil imports come from the Persian Gulf. In the long term, the country is pursuing
equity stakes in oil and gas exploration around the world.
Chart 5 Primary Consumption of Energy (% of total): 2015
SOCIETY
Population
South Korea's population is rising slowly and amounted to 50.6 million in 2015. The country
will add another 1.5 million between 2015 and 2030. Median age in 2015 was 40.8 years,
significantly above the regional average and 9.0 years greater than the figure for 2000.
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Perhaps the most important population shift which is occurring is a large increase in the
number of those over 65 years. In 2015, this group made up 13.1% of the total and it will
account for 24.2% by 2030. Long-run projections by the UN suggest that South Korea could
have one of the oldest populations of any country in the world by 2050.
The fiscal impact of ageing will be great, given the rapid pace of demographic change. If
participation rates remain stable, the absolute size of the labour force will begin to decline
before the end of this decade. With its labour force contracting, South Korea could face a
fall in the potential growth rate without remedial action. Improvements in the working
environment for females are essential in view of the looming labour shortages.
Chart 6 Age Pyramid in 2015 and 2030
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Statistical Summary
2010
2011
2012
2013
2014
2015
Inflation
(%
change)
2.9
4.0
2.2
1.3
1.3
0.7
Exchange
rate (per
US$)
1,155.80
1,108.37
1,127.06
1,094.73
1,052.97
1,131.02
Lending
rate
5.5
5.8
5.4
4.6
4.3
3.6
GDP (%
real
growth)
6.5
3.7
2.3
2.9
3.3
2.6
GDP
(national
currency
millions)
1,265,308,000.0
1,332,681,000.0
1,377,456,600.0
1,429,445,500.0
1,486,079,300.0
1,558,591,500.0
GDP (US$
millions)
1,094,746.1
1,202,382.5
1,222,166.7
1,305,756.6
1,411,327.2
1,378,045.7
Birth rate
(per '000)
9.5
9.5
9.4
9.4
9.3
9.3
Death rate
(per '000)
5.2
5.2
5.3
5.5
5.7
5.8
No. of
households
('000)
17,339.4
17,662.5
17,934.7
18,202.9
18,466.3
18,724.6
Total
exports
(US$
millions)
466,383.8
555,213.7
547,869.8
559,632.4
572,664.6
526,756.5
Total
imports
(US$
millions)
425,212.2
524,413.1
519,584.5
515,585.5
525,514.5
436,499.0
Tourism
receipts
(US$
millions)
9,765.0
12,304.0
13,607.3
15,930.2
Tourism
spending
(US$
millions)
17,669.0
19,463.0
19,526.3
21,096.6
Urban
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population
('000)
40,974.4
41,423.2
41,749.0
42,063.1
42,364.6
42,653.1
Urban
population
(%)
82.9
83.2
83.5
83.8
84.0
84.3
Population
aged 0-14
(%)
16.1
15.6
15.1
14.7
14.4
14.0
Population
aged 15-64
(%)
72.8
73.0
73.1
73.1
73.0
72.9
Population
aged 65
(%)
11.0
11.4
11.8
12.2
12.7
13.1
Male
population
(%)
50.1
50.1
50.1
50.0
50.0
50.0
Female
population
(%)
49.9
49.9
49.9
50.0
50.0
50.0
Life
expectancy
male
(years)
77.2
77.7
78.0
78.3
78.5
78.9
Life
expectancy
female
(years)
84.1
84.5
84.6
84.8
85.1
85.3
Infant
mortality
(deaths per
'000 live
births)
3.2
3.0
2.9
3.0
3.0
2.8
Adult
literacy
(%)
98.8
98.9
99.0
99.1
99.1
99.2
2015 Share
(%)
2015 Share
(%)
54.2
43.2
14.1
17.1
12.6
17.1
7.2
11.0
5.9
4.0
3.8
3.9
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