Trinh Nguyen (Natixis) | External headwinds may seem to be only getting stronger, but the worst is likely over for the Korean economy. For most of 2023, the peninsula was reeling from the lagged impact of 300bps rate hike, double digits decline of exports, and uncertainty from US-China geopolitical rivalries that have negatively impacted its key sectors such as semiconductor production. In response, policy makers have made a series of decisions that not only averted economic and financial meltdown but also staged a sound foundation for recovery. These decisions are a) keeping rates on hold and selectively easing policies for areas of stress such as project finance and real estate; b) persisting in investment in high-tech areas; and c) carving out new markets for its high-tech goods by putting itself in a unique position to benefit from the US policies to exclude China in high-tech sectors such as semiconductors, electric vehicles (EV) and renewable.
From autos to batteries and semiconductors, Korean firms have persistently kept high levels of investment even as revenue declined sharply in 2023, thanks to its large cash buffer and determination to stay at the technological frontier as rivals such as China push to narrow the gap. Such commitment will help it benefit from the cyclical rebound of the semiconductor sector, which is already showing signs of growth by early Q4 2023. Beyond the cyclical rebound of exports, Korea positioning as a US ally (Korea has an FTA with the US) in the geopolitical fight with China is helping it secure a range of benefits, such as access to US markets with reduced Chinese competition in areas where China dominates such as renewable and EV supply chain due to the US Inflation Reduction Act (IRA). Even in semiconductors, Korean firms are not just benefiting from US subsidies but also getting exemptions from curbs of exports to China, which will help it excel not just in US but also Chinese markets. As a result, FDI outflows have surged to the US. At the same time, FDI inflows into South Korea have increased sharply as firms target high-tech sectors.
While the BOK is unlikely to have space to cut rates for the rest of 2023 and even H1 2024, the peak of the USD thanks to the Fed reaching its terminal rate, risk-on sentiment, and likely inclusion of FTSE Russell WBGI in March 2024 should loosen financial conditions. Already, in 2023, despite headwinds, South Korea received the most portfolio inflows in Asia, mostly in bonds, thanks to expectations of the turn of the tech cycle, the BOK reaching its terminal rate, and inclusion of a bond fund, which should support more passive flows. Thus, for all these reasons, South Korea is expected to bounce back in 2024.
South Korea’s economy to accelerate in 2024 thanks to better exports, higher capital flows and easing of financial conditions
