Saturday, April 13, 2024
CEOWORLD magazine - Insights - South Korea


South Korea

South Korea Flag

GDP: USD1665.2bn (World ranking 13)
Population: 51.6mn (World ranking 29)
Form of state: Presidential Republic
Head of government: Yoon Suk-yeo (President)
Next elections: 2024, Legislative


  • Advanced economy with high per capita income
  • Sound financial sector
  • Solid external position (low external debt, ample foreign exchange reserves, etc.)
  • Strong business environment
  • Firmly established democracy


  • Geopolitical risk (stemming from North Korea)
  • Economic vulnerabilities due to dependency on external demand
  • Elevated household debt
  • Slowly improving but still weak corporate governance
  • Aging population

Economic overview

Moderate recovery amid easing inflation expected in 2024

South Korea is a major Asian economy, recognized for its thriving industrial sector and electronics exports. Its rapid economic development (one of the fastest rates seen over the past decades) earned it the title of “Asian tiger”. The economy is strong and modern, with sound finances and an educated and skilled workforce. However, its aging population and stance against immigration raise concerns about future economic activity.

South Korea has historically exhibited solid economic growth rates, averaging +4.9% in the 2000s and +3.3% in the 2010s. The Covid-19 pandemic and the country’s stringent testing, tracing and isolating strategy led to a shallow full-year recession in 2020, with GDP contracting by just -0.7%. 2021 brought about a strong recovery (+4.3%) as the export-oriented economy benefited from the rebound in external demand. Growth then moderated to +2.6% in 2022 and slowed further to just +1.3% in 2023, dragged down by weakening external demand as well as domestic consumption and investment. In 2024-2025, the economic situation should improve on the back of the expected recovery in external demand and the easing of monetary policy by the Bank of Korea (BoK, the central bank). We project annual real GDP growth to average +2.2% during this period.

Inflation in South Korea rose from 2.5% in 2021 to 5.1% in 2022, though it remained significantly lower than the OECD average (9.6%). It eased to an estimated 3.8% in 2022 and is expected to decline further to below 2% in 2024, driven by modest demand and falling producer prices. This should allow the BoK to embark on a gradual monetary easing cycle by mid-2024.

Solid public and external finances, watch out for household debt

The pandemic marked a turning point in the country’s fiscal policy as it shifted from a conservative stance to an expansionary one, owing to a public investment initiative in response to the pandemic. Following a quarter of a century of positive budget balances, South Korea has registered annual fiscal deficits since 2020, albeit comparatively small ones (around -1% of GDP on average). Narrow fiscal deficits are expected to remain the norm in the coming years as the government invests in research and development, while pressures from growing pensions and healthcare requirements for the aging population increase. South Korea’s public debt rose from 42% of GDP in 2019 to 54% in 2023 but is forecast to remain below 60% in the next few years, a still favorable ratio compared to the OECD average that is approaching 100%.

The real issue to monitor in South Korea is household debt, which amounted to 105% of GDP in 2023, in the form of mortgages. That said, financial risks overall are contained, given a robust and regulated financial system and sufficiently capitalized banks. Another important concern is the aging population, a structural threat to the South Korean economy: With the world’s lowest fertility rate – 0.81 children per woman in 2021 – the median age of the population is rapidly rising, reaching 44.5 years in 2023, adding pressure on pensions and setting the stage for harsh labor reforms.

South Korea’s external position is favorable in the short term but the economy may face some medium-term challenges. The current account balance has posted continued annual surpluses since 1998, even during the Great Financial Crisis and the Covid-19 crisis. It dropped to +1.8% of GDP in 2022 due to rising energy import prices but is expected to recover to +2% of GDP by 2025. Vulnerability stems from a concentration in shipments: exports are in the electronics sectors and China (23% of exports in 2022) and the US (16% of exports in 2022) remain the dominant destinations. In a context of growing geopolitical tensions, this jeopardizes the medium-term stability of the country’s exports.

South Korea’s gross external debt is comparatively low at less
than 40% of GDP and that ratio is expected to decline in the
coming years. Moreover, the country is a net external creditor.

Business environment and political developments

South Korea exhibits a strong business environment. The Heritage Foundation’s Index of Economic Freedom survey of 2023 ranks it 15th in the world for doing business and 5th in Asia. It performs especially well with regard to property rights, judicial effectiveness, fiscal health and business and trade freedom, while the tax burden, investment freedom, financial freedom and labor freedom show some weaknesses. The World Bank Institute’s annual Worldwide Governance Indicators surveys regularly assign South Korea strong scores for its regulatory and legal frameworks, though the level of perceived corruption has some room for improvement. Our proprietary Environmental Sustainability Index ranks South Korea 74th in 2023, reflecting good resilience to climate change and favorable ratios for energy use and CO2 emissions per GDP. Yet, the renewable electricity output is very low.

After the tight election in 2022, President Yoon Suk Yeol of the conservative People Power Party (PPP) has been focusing on deregulation and tax cuts, as well as ideologically conservative policies. His party does not have a majority in the unicameral parliament, which is dominated by the opposition (Democratic Party), creating a confrontational law-making situation that is likely to last at least until the legislative elections of April 2024. The result of these elections is quite uncertain as many voters remain undecided and the Democratic Party is facing some turmoil amidst investigations against its leader Lee Jae-myung. Although none of the parties enjoy broad political support, strong democratic sentiment guarantees a well-established political system. South Korea hovers around the 20th place in the Economist Intelligence Unit’s Democracy Index and is described as a “full democracy”. Meanwhile, relations with North Korea are not expected to improve under the presidency of Yoon Suk Yeol in part given the context of still simmering tensions between China, North Korea and the US.


CEOWORLD magazine - Insights - South Korea