South Korea
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Last updated: March 2022
South Korea is the tenth largest economy in the world and the fourth largest in Asia. Even though per capita incomes in South Korea lag most advanced economies, the business climate outperforms and growth is on par with advanced economies. Creditworthiness is high, as is the case in many advanced economies.
This chart is a cobweb diagram showing how a country measures up on four important dimensions of economic performance—per capita income, annual GDP growth, business climate and creditworthiness. Per capita income is in current US dollars and is the five-year average between 2022 and 2026 as provided by the IMF. Annual GDP growth is the five-year average between 2022 and 2026. Business climate is measured by the World Bank’s latest Ease of Doing Business ranking of 190 countries. Creditworthiness attempts to measure a country's ability to honour its external debt obligations and is measured by its OECD country credit risk rating. The chart shows not only how a country performs on the four dimensions, but how it measures up against other regional countries.
Economic outlook
South Korea’s GDP growth hit an 11-year high of 4% in 2021 on the back of strong exports and investment following the COVID-19 induced downturn in 2020.
The IMF forecasts robust but slower growth of 3% in 2022. Strong global demand for Korean semiconductors, used in personal computers, servers, mobile phones and the automotive industry, will continue to support the economic recovery. The government’s recently announced KRW14 trillion (US$11.7 billion, or about 0.7% of GDP) supplementary budget will support incomes of small business owners still struggling from the pandemic. But rising Omicron cases remains a constraint on domestic demand and poses downside risks to the near-term outlook. A stronger economy and rising inflation prompted the central bank to raise its policy rate to 1.25% earlier this year, and the possibility of further rate hikes are likely to weigh on private consumption.
Longer term, the South Korean authorities’ proactive planning to identify new growth engines opens possibilities to boost future economic potential. For instance, the so-called “Korean New Deal” aims to increase investment in green and digital sectors (including solar panels and wind turbines, electric vehicles, cloud computing and artificial intelligence) and strengthen the employment safety net.
South Korea is one of the few countries that has successfully transformed itself from a low-income to a high-income economy, although income inequality remains high. The government recently increased minimum wages, provided basic pensions for the elderly and greater unemployment benefits for the youth to help tackle income inequality. As the economy grows and government measures gain traction, the IMF projects GDP per capita to rise toward US$45,000 in 2026 from an estimated US$35,000 in 2021.
Country risk
Country risk in South Korea is low, suggesting a low likelihood that it will be unable and/or unwilling to meet its external debt obligations. The three private ratings agencies have high investment grade credit ratings for South Korea.
South Korea’s business climate ranked fifth out of 190 economies on the World Bank’s ease of doing business gauge. South Korea outperforms most other advanced economies across all areas of doing business, especially resolving insolvency, enforcing contracts and accessing ample electricity. That said, South Korea’s business landscape is dominated by “chaebols”—large corporate conglomerates run by powerful families. Chaebols dominate the economy and account for up to 90% of Korea’s GNP; they are often scrutinised for their influence in Korean politics.
The risk of expropriation is low. According to the US investment climate statements, South Korea follows generally accepted principles of international law with respect to expropriation. South Korean law protects foreign-invested enterprise property from expropriation or requisition. Private property can be expropriated for a public purpose—like urban redevelopment, building new industrial complexes, or constructing roads. Property owners are entitled to prompt compensation at fair market value.
Political risk is also low and is mainly driven by long-standing tensions with North Korea. Periodic tensions in South Korea's bilateral relations with larger neighbours, including China and Japan, have led to occasional disruptions to the economy. The domestic political environment remains relatively stable.
Fiscal, monetary and regulatory institutions are very strong, as reflected in a long-track record of robust economic management. But governance indicators are slightly lower than most other advanced economies. In particular, corruption remains a significant constraint on the institutional environment and doing business. This reflects in part perceptions of the disproportionate influence of the country's chaebol on the economy and government. Ongoing government efforts to reduce corruption could strengthen governance standards over the medium to long term.
Bilateral relations
South Korea is Australia’s fourth largest trading partner, after China, Japan and the US. Bilateral trade accounted for around $35 billion of Australia’s international trade in 2020 (4.4% of total).
The KAFTA—Australia’s bilateral trade agreement with Korea—which came into force in December 2014, lowered tariffs between the two countries and has significantly strengthened trade relations. Emtivac Engineering, which supplies pumps and compression systems to Hyundai, is one Australian company that has benefitted from growing trade with South Korea.
Goods and services exports to South Korea totalled $25.2 billion in 2020, driven largely by shipments of iron ore, coal, LNG, and beef. Australia is also among the world’s biggest suppliers of agricultural and food related products to South Korea. Australian imports have risen and fallen sharply in the past few years, reflecting the one-off purchase of Korean-made ships in 2017 (around $18 billion). The COVID-19 pandemic has also disrupted bilateral trade over the past couple of years. Australia’s main goods imports from South Korea included cars and refined petroleum in 2020.
Over the longer term, South Korea’s focus on boosting “green” and “digital” investments is positive for Australian exporters, particularly of iron ore, copper, food and beverage. It also opens opportunities for aerospace, automotive, shipbuilding, electronics and machinery exporters to supply South Korea’s strong manufacturing base.
Services trade between the two countries is smaller than goods trade. Total services trade stood at $1.6 billion in 2020, almost 50% lower than in 2019, having been hit hard by the pandemic. The FTA supports opportunities for suppliers of legal, accounting and telecommunications services and enhances market access for other services, including financial services and education.
Prior the pandemic, tourist arrivals averaged around 290,000 per year from 2016-19 and Australia consistently received around 30,000 international student enrolments. The COVID-19 pandemic and associated international travel restrictions has disproportionately hurt services trade over the past couple of years. The ongoing pandemic points to another year of uncertainty for services exports in 2022. Beyond the pandemic, rising incomes in South Korea will support demand for Australian education and tourism.
South Korean direct investment in Australia has grown sharply over the past 15 years, totalling $32.7 billion in 2019 (0.8% of total). Trade and investment between Australia and South Korea has been gradually expanding beyond resources, into areas such as tourism, technology, engineering, real estate and infrastructure.
Australian investment in South Korea, at nearly $25 billion in 2020, has been growing solidly over several years. A large proportion of this Australian investment has been made by financial and infrastructure firms.
