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South Korea’s history of economic success is sustained by its ability to adapt to the accelerating pace of global change. It is the fourth biggest economy in Asia and the 10th largest by nominal Gross domestic product (GDP) worldwide. Its massive transformation after the end of the Korean War in 1953 turned the country into an industrial powerhouse and opened its gates to foreign economies.
Its export-oriented policies and investment in innovation played a crucial role in developing the economy into what it is now. Textiles and light manufacturing were the first industries targeted for economic development before shifting to heavy industries such as iron and steel and chemicals manufacturing.
Later on, South Korea refocused its efforts toward high-technology industries, such as automobile and electronics production, as well as information technology. The government’s economic strategy allowed real GDP growth to average 7.3% annually between 1960 and 2019.
In 2020, South Korea’s GDP growth was at -1% – the worst performance since 1998, due to the coronavirus pandemic-related collapse.
However, the South Korean economy rebounced in 2021, registering a GDP growth rate of 4.0%, its quickest rate in 11 years, powered by robust semiconductor and auto exports.
In 2022, South Korea’s economy grew by 2.6% and for 2023, the International Monetary Fund (IMF) forecasts a growth of 1.7%.
South Korea GDP Annual Growth Rate (in %)
However, the IMF warned that the country needs to be vigilant of its government spending to prevent a future debt explosion with its population rapidly aging.
Korean household debt is among the highest in the OECD at over 190% of net household disposable income, a significant portion of which is secured by real estate. Lending has grown quickly across all sectors since the pandemic outbreak, pushing credit as a percent of GDP further above its trend value.
The IMF expected South Korea’s debt-to-GDP ratio to increase to 54.1% in 2022 and reach 57.7% by 2027. However, the government said it will tighten spending to keep the debt-to-GDP ratio at mid-50% by 2027.
Currency and Central Bank
The South Korean won is the country’s official currency and is issued by the central bank, the Bank of Korea (BOK). Over the past decade, the value of the won has been relatively stable. However, the currency saw some backdrop against the US-Dollar in 2022, remaining more than 9% weaker as of Mid-December.
The central bank was established on June 12, 1950, in Seoul and is currently led by BOK Governor Chang-yong Rhee. The BOK’s Monetary Policy Committee is tasked with the formulation of monetary and credit policies in the country.
After the won weakened at the fastest pace in Asia in Q3 2022, consumer-prices grew to 5.7% in October. IMF expects inflation to stand at 5.5 this year, followed by 3.8 in 2023.
South Korean economy: Inflation (in %)
Industry and Trade
South Korea has transformed from an agricultural country to a highly industrialized one over the past 60 years and is now recognized as the largest semiconductor producer in the world. To foster growth, the country emphasized technology development and innovation.
The service sector has become the largest and fastest economic sector in South Korea, comprising almost 60% of the country’s GDP while employing 70% of the active population. The leading industries in this sector are department stores, store chains and supermarkets. One of the fastest-growing industries is tourism but it was impacted by the global pandemic.
The manufacturing sector comes next, accounting for 38% of the GDP and providing jobs to 25% of the workforce. The main industries in this sector are textile, steel, automobile manufacturing, shipbuilding and electronics.
Meanwhile, the agricultural sector has lagged behind, only contributing 2% of the nation’s GDP while employing around 4% of the active population. The main agricultural products in South Korea are barley, wheat, corn, soybeans and sorghum. Large-scale livestock farming also plays a big part in this sector.
In 2020, trade represented about 70% of South Korea’s GDP. The country is currently the seventh biggest exporter in the world. Its main export products are integrated circuits, automobiles, refined petroleum, vehicle parts, and passenger and cargo ships. The nation’s main export partners are China, the US, Vietnam, Hong Kong, and Japan.
South Korea Balance of Trade
In terms of total imports, South Korea ranks ninth globally. Its top import products are crude petroleum, integrated circuits, petroleum gas, refined petroleum, and coal briquettes. The country’s top import partners are China, the US, Japan, Germany and Vietnam.
Stock Exchanges and Capital Markets
The Busan-based Korea Exchange (KRX) remains the only securities exchange operator in the country after the Korea Stock & Futures Exchange Act integrated the Korea Stock Exchange (KSE), Korea Futures Exchange, and KOSDAQ Stock Market.
KRX is the 13th largest stock exchange in the world, with a market capitalisation of $2.44 tn. The Korea Composite Stock Price Index (KOSPI), which is the representative stock market index of South Korea, is calculated based on market capitalization.
Foreign investors may bet on the South Korean economy through exchange-traded funds (ETFs) that offer immediate diversification. These ETFs mostly focus on large to mid-sized companies.
Bond Market
The South Korean bond market is one of the largest in Asia. Over the past years, it has undergone several reforms and development geared toward slow but steady market liberalisation. Foreign investors are welcome to purchase all types of fixed-income instruments. Korean bonds are either government or corporate bonds.
The government issues 3-year, 5-year, and 10-year bonds on a regular basis, and in the form of treasury bonds, National Housing Bonds, and Seoul Metropolitan Subway Bonds.
In 2022, the South Korean economy suffered its worst credit crisis since the global financial crisis. The government responded by using its bond stabilization fund of 20 tn won that had been set up in response to the pandemic. Furthermore, the central bank provided liquidity and raised the key interest rate in small steps. Major banks and large brokerage houses also pitched it with funds.
Real Estate Market
After seeing a surge of house prices in South Korea in recent years, the market is experiencing a cool down.
According to Global Property Guide, South Korean house prices rose by 4.2% in Q2 2022 from a year earlier. This is a sharp slowdown from the previous year’s 14.96% growth. On a quarterly basis, house prices fell by 1.53% in Q2.
Amongst others, stricter lending rules for borrowers are causing the market to slow down.
Bank lending to households fell 1.2 tn won ($840.96 m) in September, following a 0.3 tn won increase in August, according to Bank of Korea datay. It was the biggest monthly drop since May 2021.
South Korea Housing Index (in %)
With owning a house traditionally perceived as a sign of stability, surveys show that 83% of South Koreans want to have their own houses.
The most common type of housing in the country are apartments, which are often located in high-rise residential buildings ranging between five- to 20-storeys high. These apartments are the most preferred housing type among locals as they are built around facilities like shopping centers, sports complexes, and childcare centers.
Source of charts: tradingeconomics.com
