South Korea scores well on international comparisons of creditworthiness, growth and ease of doing business. But has a lower per capita income relative to most other advanced economies. South Korea is among a select group of Asian countries that have managed to transition from a middle-income to high-income economy over the last 50 years.
South Korea’s highly export-facing economy has suffered from softer global demand. However, expansionary fiscal and monetary policies and robust property construction have partly offset the weak external sector.
Firming US demand and windfall gains from lower oil prices will aid the outlook. But the economy faces stiff headwinds as a weaker Yen lifts the competitiveness of Japanese competitors. The recent presidential impeachment of Park Geun-hye will add some uncertainty to the political outlook, with possible spillovers to confidence and growth.
The long term outlook is more difficult. The aging population will reduce the size of the work force, while productivity growth continues to trend lower. Another challenge is to re-balance the economy away from its dependence on exports, which are facing rising competition from lower-cost manufacturers in the rest of Asia. But achieving more consumption driven growth will be difficult because households are heavily indebted.
South Korea is a high-income economy, although income per capita lags behind most other developed nations. Per capita income is expected to rise—reaching a level by 2020 at which economies like Japan and Israel now sit.
South Korea enjoys an investment grade credit rating. This suggests a relatively low likelihood that it will be unable or unwilling to meet its external debt obligations in a systemic sense (though, needless to say, individual debtors can and do default).
South Korea’s business climate comes in at 5 out of 190 economies on the World Bank’s ease of doing business gauge—which measures regulation and red tape relevant to a domestic small to mid-sized firm. It outperforms most other advanced economies, although registering property is more difficult in Korea.
A key characteristic of Korea’s development has been the existence of Chaebols (a conglomerate of family-controlled firms) that participate in most areas of business from manufacturing to banking. These firms exert considerable market power, which can pose problems for competing firms both domestic and foreign.
South Korea scores in the top 75% in almost all areas of governance, however it lags behind most other advanced economies. Political stability and absence of violence scores are particularly low by developed world standards. Instability in North Korea poses the most significant security threat. The Korean War never technically ended; an armistice has been in place since 1953.
South Korea is Australia’s fourth largest trading partner. Australian exports of goods and services to South Korea were worth US$19.7b in 2015-2016. Merchandise exports consisted of mainly of coal, iron ore, beef and aluminium. Australia is the third biggest supplier to Korea for agriculture and food related products. Import payments to Korea totalled US$14b in 2015-2016, made up primarily of refined petroleum, passenger vehicles and heating and cooling equipment.
Service exports to Korea were worth A$1.9b in 2015-2016 with tourism and education forming the lion’s share. South Korea was Australia's fourth largest source of foreign student enrolments in 2015. It was the third largest source of enrolments in 2013, but has since been overtaken by Vietnam.
Two way trade should rise over time following the 2014 free trade deal. The Agreement will reduce tariffs on Australian exports by 99.7% when fully implemented. It will also improve market access for suppliers of legal, accounting and telecommunications services and guarantees open access across a broad range of other services sectors, including financial services and education.
KAFTA will also lower the cost of Korean products and inputs for Australian businesses as Australia removes tariffs on Korean goods. An example of a smaller exporter to Korea is Emtivac Engineering, which currently exports pumps and compression systems to Hyundai.
South Korea is Australia’s ninth largest source of visitor arrivals; however, this has been flat since 2009. The strong Aussie dollar was partly responsible — But since 2014 the won has gained 8% against the AUD, which could be behind the upturn since 2015.
South Korean direct investment in Australia has grown 8% p.a over the last five years. However, it only accounts for 0.8% of foreign investment in Australia. Korea is a large commodities importer and its investments have focused on the resource sector to shore up supply chains.
Korea Zinc's A$1b investment in Queensland and POSCO's A$1.6b investment in iron ore resources at the Roy Hill iron ore mine in Western Australia are examples. Other Korean companies such as KOGAS, KEPCO, SK Energy and KORES have also invested in Australia. Under KAFTA, Korea will have access to the higher Foreign Investment Review Board screening threshold. This is expected to help diversify and grow investment from Korea into Australia.
Australian investment in Korea is 1% of its total foreign investment portfolio.
Department of Foreign Affairs