Things to watch in South Korea in 2021

Article tags EconomyAsiaSouth KoreaCountry AnalysisBusiness, Industry

• South Korean firms are well placed to benefit from the widening divide over technology between the US and China. Telecommunications and consumer electronics companies will gain global market share as their Chinese competitors face more restrictions.
• A recent rapid rise in property prices will continue in 2021, despite government cooling efforts, owing to tight supply and firm demand. Systemic risks tied to the sector are building in the financial system, increasing the economic impact of an eventual correction.
• High house prices and increasingly strained inter-Korean relations will revive the political fortunes of the conservative opposition. This will push the government to adopt a harder approach towards North Korea.

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South Korea will experience an economic rebound in 2021, with the country’s campaign against the coronavirus (Covid-19), characterised by light-touch yet effective measures, translating into a relatively smooth normalisation of consumption and production. However, the recovery is likely to be uneven across sectors. In this piece, The Economist Intelligence Unit explores three key areas that need to be watched in the country during 2021.

US-China technological bifurcation will work in South Korea’s favour

The intensifying trade and technology conflicts between the US and China—particularly widening US sanctions on Chinese technology companies—offer both risks and opportunities for South Korea Inc. However, on the whole, we believe that South Korean firms will be among the primary beneficiaries as the technology divide between the US and China widens in 2021.

Concerns over strategic infrastructure security and data privacy have led governments in many countries, including the US, the UK, Japan and Australia, to restrict or ban the use of equipment manufactured by Huawei (China) in local 5G mobile networks, with more countries contemplating similar restrictions. The US ban on the supply to Huawei of semiconductors that use US chipmaking equipment, intellectual property or design software (unless a licence is obtained from the US government) will undermine that company’s production capacity in 2021 and diminish its share of the global market for consumer electronic devices. Other Chinese mobile device companies will take up some of the market share vacated by Huawei, but collateral reputational damage will create obstacles for them in expanding their presence in markets outside China.

We believe that South Korean companies stand out as ready to gain share in the global telecoms and consumer electronic devices market as their Chinese competitors are forced to retreat. Samsung, which is the world’s largest smartphone producer and also manages a rapidly expanding 5G equipment business, will lead this quest for new business. The company has already made moves with a US$6.6bn five-year deal concluded in September to provide 5G wireless solutions to Verizon, a US telecoms company. We believe that it will also provide strong competition in the EU and Japanese telecoms markets.

Conversely, US sanctions on Huawei will threaten the revenue of South Korean semiconductor manufacturers such as Samsung and SK Hynix, both of which have the Chinese company as a main client. However, the South Korean chipmakers have already applied for the necessary licences to continue supplying chips to Huawei, and we believe that they will obtain them in 2021, especially if—as we forecast—the Democratic candidate, Joe Biden, wins the US presidential election in November. Moreover, the loss of revenue tied to the current suspension of exports to Huawei will be offset in part by increasing sales to other clients (in China and elsewhere), which are likely to raise orders in an attempt to increase market share.

The resilient performance of the electronics industry will underpin the recovery in South Korea’s economy in 2021; in our next country report we will forecast growth of 2.9% in that year. We also forecast that merchandise exports, measured in US dollars, will increase by 10% in 2021, following an estimated decline of 9.2% in 2020.

The property bubble will keep growing—dangerously

Domestically, the property market will continue to attract public attention and policy focus in 2021. We expect house prices to maintain their upward trend, despite a series of government cooling measures. These include a price cap on new apartments in certain districts in the capital, Seoul (where the income-to-house price ratio reached 12.1 in 2019, according to data from the National Assembly Research Service), and higher rates of capital gains tax for owners of multiple properties.

Two factors will drive the anticipated growth in housing prices. On the supply side, the housing stock is near a historical low. The number of unsold new properties slipped under 29,000 in July, just above the record low level recorded in April 2015. The low level of housing stock will not only help to sustain the persistent increase in prices for new properties, but will also add upward price pressure in the second-hand property market.

On the demand side, property remains South Koreans’ favourite investment asset. Apartments in prime districts of big cities are especially popular, owing to their limited supply and high liquidity. Investment-related demand for property is compounded by sustained real housing demand in large urban areas, where people are attracted by better job opportunities. In 2021 demand in the property market will be underpinned by ultra-accommodative monetary policy.

Owing to these factors, we do not expect a sharp correction in the property market to take place in 2021. However, the combination of rising property prices, growing household indebtedness tied to the property market and an anticipated increase in non-performing loans in the banking sector will lead to higher systemic risks in the financial system, creating the conditions for a subsequent sharper correction. The trigger for that could be a substantial increase in housing supply or sudden policy tightening by the authorities, amid concern about runaway home prices and household debt.

Politics will see a conservative comeback

South Korea’s main conservative opposition party will accelerate its political revamp in 2021. After a crushing defeat in the general election held in April 2020, the country’s conservative camp has regrouped under the interim leadership of Kim Chong‑in, a political veteran and former interim chairman of the ruling Minjoo Party, and adopted a new name—the People Power Party (PPP). The party has already made pragmatic shifts to align itself more tightly with public opinion, such as adopting a more tolerant attitude towards expansionary fiscal policy. Such adjustments will help it to move on from previous corruption scandals involving its senior figures.

Social strains generated by high house prices will provide fresh ammunition for the opposition to criticise the Minjoo administration led by the president, Moon Jae‑in. The government’s biggest weakness, however, will lie in foreign policy, especially its stance of rapprochement towards North Korea. We believe that the impasse in denuclearisation talks and an increasing military threat from the North will expose the shortfalls of the government’s focus on inter-Korean diplomatic engagement and economic co‑operation. Public opinion on the issue will incline towards the conservatives, who have traditionally adopted a hardline approach. We expect the PPP to capitalise on the government’s mixed foreign policy record to close the gap in public support between itself and Minjoo.

A conservative revival will not dramatically alter the political dynamic, with the next presidential and parliamentary polls not due until 2022 and 2024 respectively. However, it will force the government into some important adjustments; for example, it will prod the administration into increasing public expenditure beyond its proposed budget for 2021, in the form of a populist supplementary budget, in order to boost employment and facilitate the recovery of small and medium-sized enterprises. In addition, Moon Jae‑in’s administration will toughen its approach towards North Korea, working alongside the US government to increase pressure on the regime to return to the negotiating table, while stepping up efforts to strengthen South Korea’s defence capabilities.

Thu, 15th Oct 2020 Article tags EconomyAsiaSouth KoreaCountry AnalysisBusiness, Industry