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Korea Politics December 2021

Korea: Conservative Yoon narrowly wins presidential election

The conservative Yoon Suk-yeol was victorious in the recent 9 March presidential election, winning 48.6% of the vote—just a hair’s breadth above the 47.8% received by his rival Lee Jae-myung of the ruling Democratic Party of Korea. This said, a significant overlap in Yoon and Lee’s policy proposals, plus continued control of parliament by Lee’s party, means that drastic change in economic policy is unlikely. The open nature of Korea’s economy also means that it has historically depended more on external conditions rather than domestic and political factors. Nonetheless, the conservative candidate’s election will likely have significant macroeconomic implications, especially regarding fiscal policy and the housing market. Success of these policies will be key if the country is to tackle rising house and rental prices, rising inequality and a struggling SME sector, all of which serve as a drag on economic activity.

With regards to fiscal policy, Yoon has pledged to cap Korea’s public debt to GDP ratio at 60.0%. This would likely imply future budgets will be less expansionary than under a Lee government, limiting the support to aggregate demand coming from government consumption. Although Yoon has in the past supported significant government outlays to support the ailing SME sector and has pledged further support, the president-elect plans to fund such spending through cuts to other areas of non-priority government consumption. Thus although Yoon’s fiscal policies will likely go some way to supporting the SME sector, which will aid business activity, their relatively contractionary nature means they are also likely to drag on aggregate demand ahead.

Now turning to the housing market, Yoon’s policies are likely to focus on constraints to supply rather than to demand. Yoon has emphasized the role the private sector—as opposed to the public sector—has to play in easing exorbitant house and rental prices. Private sector construction activity will be boosted by deregulation and tax incentives (such as?). That said, Yoon has also pledged policies to reduce demand-side constraints, such as raising the loan-to-value ratio for first time buyers. If successful, the policies would boost economic activity by increasing construction activity and reducing cost-of-living pressures on Korean households, with Yoon aiming to increase the annual growth of housing supply by 10.0%. But it remains to be seen whether such policies will significantly affect housing and rental prices, especially when compared to the significant public construction program proposed by Lee.

Yoon’s victory may also affect the Bank of Korea’s monetary policy: the current governor’s mandate expires on 31 March, with the new governor likely to be chosen in consultation with Yoon. Although both leading candidates in the presidential election refrained from comments on the path of the BoK’s monetary policy, given Yoon’s probable tightening of fiscal policy, a preference for a more dovish central bank governor may be likely, with the burden of supporting aggregate demand being shifted from fiscal to monetary policy.

Looking at a further potential implication of Yoon’s election, ING’s Min Joo Kang comments on a future Yoon-led foreign policy:

“The President-elect is expected to take a stronger stance on North Korea […and] seek a strengthening of the alliance with the U.S., which is consistent with the long-standing approach of the conservative party. Foreign policy has, however, become more complicated as global supply-chains have diversified. Trade is a critical growth engine for Korea. China has become the largest trade partner in terms of exports (25% of total exports in 2021), at the same time, Korea heavily depends on the U.S. for access to new technologies such as semiconductors, bio, and renewable energy. Thus, complications in global supply chains could intensify to some extent if the geopolitical situation surrounding the Korean peninsula worsens.”

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