Korea Special March 2017


Korea: Economy at stake as Constitutional Court confirms Park Geun-hye's ousting

March 17, 2017

On 10 March, Korea’s eight-member Constitutional Court unanimously upheld the decision by the National Assembly to impeach President Park Geun-hye. The Court’s ruling followed months of rancorous protests and policy inaction after Park was found to be involved in an influence-peddling scandal, which has rocked the country’s political arena since its eruption in October. The country will now hold a snap presidential election on 9 May to replace the disgraced former president. A new government will face the onerous task of shoring up consumption among indebted households and supporting employment in an economy plagued by faltering mainstay industries. It will also need to address citizens’ calls for better corporate governance and strike a fragile balance between China and the U.S. at a time of escalating geopolitical tensions in the region.

Analysts expect a new administration to embark on an expansionary fiscal policy, faced with an otherwise bleak economic outlook. Months of political vacuum have thwarted Park’s structural reforms and a recent diplomatic row with neighboring China has exposed Korea’s external sector to potential retaliatory measures. The 2017 budget is particularly conservative and there is ample leeway to increase spending this year—a move that is increasingly being demanded by businesses and policymakers. Moon Jae-in, a former opposition leader and the frontrunner to succeed Park, has already pledged to push for a supplementary budget if he is elected, while his conciliatory tone with North Korea and China is likely to ease strained relations with both.

In the wake of Park’s scandal, parties across the political spectrum have vowed to improve corporate governance among Korean conglomerates, or chaebols. Current business law amendments remain stuck in Congress after disagreements among parties prevented the bills from being passed in the February assembly. However, greater public outrage this time around and Moon’s open advocacy towards increased economic democratization could tilt the balance after May’s elections. Chaebols are the core of the Korean economy, but their close ties with the political establishment and their lack of accountability and transparency have often sparked protests.

The scandal has engulfed the country’s political elite, allowing other problems to fester. Korea’s household debt reached an all-time high at the end of 2016. The recent decision from the U.S. Fed to hike interest rates has further increased debt service payments by pushing up yields in Korea. Sudden capital outflows are a potential risk if the Fed accelerates its monetary tightening. Unemployment has spiked recently, with corporations remaining cautious about investing and hiring as they await for the new government’s policy direction. Meanwhile, the shipping and shipbuilding industries, the cornerstones of the Korean economy, continue to suffer from chronic oversupply and weak global trade.

By protesting unrelentingly in favor of Park’s impeachment, Korean society choose to prioritize seeking reform and justice over near-term economic concerns. The challenge facing a new government will be to lay the bases for the once gleaming economy to return to a path of strong, broad-based growth. Since the scandal broke out in October, FocusEconomics panelists have reassessed their growth projections and now expect the Korean economy to expand 2.4% in 2017, which is down 0.2 percentage points from October’s forecast.

Author:, Economist

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