Korea: The macroeconomic implications of Conservative Yoon's narrow presidential win
March 9, 2022
The conservative Yoon Suk-yeol emerged 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 incumbent Democratic Party of Korea. A significant overlap between Yoon’s and Lee’s policy proposals, plus continued control of parliament by Lee’s party—at least until the 2024 parliamentary elections—makes drastic change in economic policy unlikely. The open nature of Korea’s economy also means that economic activity has historically depended relatively more on external conditions than domestic and political factors. Nonetheless, the conservative candidate’s election could still have significant macroeconomic implications, especially regarding fiscal policy and the housing market. Achieving success in these policy areas will be key if the country is to tackle soaring home and rental prices, rising inequality and a struggling SME sector, all of which are dragging on economic activity.
With regards to fiscal policy, Yoon is likely to push for fiscal rules—such as a 60.0% cap on Korea’s public debt to GDP ratio—soon after arriving in office. This implies that future budgets could be somewhat less expansionary than under a Lee government, limiting the stimulus to aggregate demand lent by government consumption. Although Yoon has in the past supported significant government outlays to aid the ailing SME sector and has pledged further funds, the president-elect plans to partially fund such spending through cuts to non-priority government consumption. Although business activity will be aided by such support to the SME sector, the relatively conservative nature of Yoon’s fiscal policy means it is likely to drag somewhat on aggregate demand ahead, restraining economic activity.
Turning to the housing market, Yoon’s policies are likely to focus on constraints on supply rather than on demand. Yoon has emphasized the role the private sector has to play in easing exorbitant house and rental prices. Indeed, Yoon has pledged to boost private sector construction activity via deregulation and tax incentives, notably by overhauling real estate taxes. That said, Yoon has also proposed some policies to reduce demand-side constraints, such as raising the loan-to-value ratio for first-time buyers. The policies aim to increase the annual average growth of the housing supply compared to the last two years by 10.0% during his presidency. If successful, they would boost economic growth by increasing construction activity and by reducing cost-of-living pressures on Korean households. However, 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 in his campaign.
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, a preference for a more dovish central bank governor may be likely given Yoon’s probable tightening of fiscal policy. In any case, a tougher fiscal stance would allow the BOK to keep its policy accommodative for longer, 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 commented on the future of 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. […] 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 (25.0% of total exports in 2021), [and] 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.”