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Political uncertainty likely to hold back economic activity in Korea until new President comes in place, says Fitch Ratings

Political uncertainty is likely to hold back economic activity until a new president is elected. Uncertainty will delay investment and weigh on consumer confidence. In December 2016, consumer confidence fell to levels not seen since 2009.

Korea’s economy grew at a decent rate of 2.7 percent in 2016, though more slowly than what was anticipated in the last GEO (+2.9 percent). GDP growth was supported by strong government spending and by construction activity growing at unprecedented levels of 11 percent.

Furthermore, the bank lending survey has pointed to a marked deterioration in banks’ willingness to lend, which should weigh on credit growth in the months ahead. House price inflation is also slowing, but so far high-frequency data on building permits are not really pointing to any impending slowdown in construction activity. Corporate restructuring, notably in the shipbuilding industry could weigh on non-construction investment, Fitch Ratings reported.

The construction boom has been fuelled by low interest rates and the relaxation of home-loan restrictions in 2014. Indeed, household debt grew at a strong 11.7 percent y/y in 4Q16.

"We do not expect political disruption to severely affect economic activity in the medium term, but Korea could be significantly impacted by a more protectionist world given the highly open nature of the economy," the report said.

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