"South Korea Country Risk Report Q3 2016" now available at Fast Market Research

South Korea's ruling Saenuri party suffered a significant defeat in the parliamentary elections held on April 13. With no party securing a majority, the liberal opposition People's Party has emerged as a kingmaker. As such, we expect the lack of a parliamentary majority to have a negative impact on the economy and note that this could hasten President Park Geun-hye's descent to lame duck status. The economy is also likely to continue to face headwinds as bills aimed at revitalising growth languish in parliament. Accordingly, we have downgraded our short-term political risk index score to 76.0 from 79.6 previously to reflect these challenges.

Full Report Details at
- http://www.fastmr.com/prod/1191587_south_korea_country_risk.aspx?afid=301

The economy grew by 2.7% y-o-y in Q116 compared to the 3.1% expansion registered in the previous quarter. Ongoing weakness in the Chinese economy amid the increasing possibility of a political stalemate in parliament will continue to weigh on Korea's economic growth. As such, we note that the downside risks to our 2016 real GDP forecast of 2.8% are rising.

Seoul's clampdown on tax evaders bodes well for the government's attempts to enhance its revenue base as spending on welfare increases as the population ages. However, merely cracking down on tax evaders will be insufficient as the government's debt rapidly approaches the mandated legal debt ceiling, reducing Seoul's ability to impose fiscal measures. The implementation of stricter tax laws will also have a slightly negative impact on the business environment in the near term.

The BoK kept its base rate steady at 1.50% following its May 13 monetary policy meeting, but we retain our forecast for the central bank to cut its base rate by 25bps to 1.25% over the coming months to support exports against a backdrop of low inflation.

The South Korean won has benefitted against a backdrop of US dollar weakness since late-February, and we are revising our average 2016 forecast on the currency stronger to KRW1,200/USD, from KRW1,255/USD previously to reflect this. Over the long-term, South Korea's strong fundamentals such as a solid current account surplus, modest inflation, and relatively robust growth will support the won, allowing it to embark on a gradual appreciatory trend from 2017.

Major Forecast Changes

We have upgraded our 2016 average KRW forecast to KRW1,200/USD from KRW1,255/USD previously to reflect KRW strength.

We have downgraded our short-term political risk index score to 76.0 from 79.6 previously to reflect the loss of the parliamentary majority by the ruling Saenuri party.

Key Risks

Downside Risks To Economic Growth Forecast: Should we see a sharper-than-expected downturn in the global economy or even an implosion in South Korea's household debt market, we would certainly expect to see a substantial weakening in its exports sector, which, in turn may push the economy into a pronounced recession.

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