23 May 2017
Given 10 years in opposition, it may be no surprise South Korean president Moon Jae-in’s successful election campaign has led to party euphoria. The resounding nature of his victory, gaining 41.1% of the vote, and the fact it brought to an end the turbulent presidency of Park Geun-hye has raised expectations. However, what impact can the new president have on a nation frequently subjugated to global economic and geopolitical forces? Let us first deal with the politics. There are reasons to think President Moon’s mandate is more equivocal than it appears. While the popularity of the outgoing president has slumped, the conservative principles that gained her 51.6% vote share in 2012 remain attractive, particularly for South Korea’s rising proportion of retirees (see Chart 8). In contrast, President Moon’s message has resonated with younger voters, with promises on jobs and welfare. These generational divisions are unlikely to dissipate soon. The second reason for caution is the unusual political calendar. National Assembly elections typically take place in the fourth year of a five-year presidency. The most recent were in April 2016, prior to President Park Geun-hye’s scandal. Consequently, while the ruling party lost its majority there was no rout. More importantly, the Democratic Party does not have the 60% majority mandated by the 2012 National Assembly Advancement Act to pass a bill during a plenary session. This law has already been blamed for bringing the legislative process to a gridlock; and with the President and National Assembly out of step, realising the goals set out in the campaign will be challenging. So what were these goals?
The main thrust of Moon’s economic agenda includes greater fiscal spending, reducing household debt growth and reforming corporate practices. During the campaign, Moon promised to increase annual fiscal spending by 7% over five years. Despite debt to GDP of just 38%, there is unlikely to be a fiscal splurge. Fiscal spending is already on an upward trajectory, with long-term care spending rising 14.5% annually. Furthermore, Moon has signalled spending on job creation and a higher minimum wage will come from cuts elsewhere, as well as higher taxes, including property and corporate income taxes. The prospects for other flagship pledges are more favourable. Mortgage debt has been moderating since the end of last year, while defaults remain low. We are also optimistic on governance reform. Although the prospect of legislative change is limited, rewriting the governance architecture in a similar way to Japan seems feasible. The obvious question is how shareholder friendly will this reform be? While President Moon’s policy agenda is not particularly market friendly, there could be a boost to growth simply from the removal of uncertainty surrounding the previous president. South Korean household sentiment has rebounded strongly following the initial shock. However, retail sales have actually been on a recovery path throughout (see Chart 9). In the corporate sector, while capitalisation rates continue to moderate, favourable inventories and industrial activity indicators suggest firms have largely shrugged off domestic political turmoil in light of favourable global demand trends. Of course, South Korea faces major external political risk in the form of its northern neighbour. Here too, the economic data indicates that companies and households are not being put off their daily routines due to the recent escalation of tensions. However, the country is vulnerable to a deterioration in political or economic relationships with the US and China, so will remain a barometer of regional mood.
Govinda Finn, Japan and Developed Asia Economist