The ongoing corruption scandal surrounding President Park Geunhye will raise the risk of large-scale protests in 2017. Despite political uncertainty dragging on growth, a manageable debt burden and continued current account surpluses will moderate long term country economic risks. A new anti-graft law will present legal and regulatory challenges to foreign firms in the short term.
The ongoing political corruption scandal will heighten protest risks in 2017. President Park Geun-hye has been linked to charges against her close associate Choi Soon-sil, who is accused of using her ties with the president to coerce the country’s chaebol conglomerates to pay large sums to foundations in her name. From October 2016 there were regular large-scale demonstrations in response to the scandal in urban areas, with the number of protesters reaching 1.7 million in Seoul in November 2016.
Following this the South Korean National Assembly voted overwhelmingly to impeach President Park by 234 votes to 56. A Constitutional Court review will be finalised within the first six months of 2017, and if the impeachment is upheld then Park will be removed from office with new elections to take place within 60 days. In the short term anti-government protests will therefore continue, remaining largely peaceful and the risk of property damage will be limited.
However, as corruption investigations continue there is a heightened risk of individual attacks against commercial entities in relation to the scandal. In December 2016 a truck was driven into the broadcasting building of media firm JTBC, in protest at the company’s reporting on the corruption scandal, causing property damage.
The ongoing political crisis and uncertainty over the country’s future leadership will drag slightly on investment decisions in the short term. GDP growth is forecasted to fall to 2.5% in 2017 from 2.7% in 2016. This will be partially offset by up to USD 6 billion of spending on infrastructure in preparation for the 2018 Winter Olympics, to be held in Pyeongchang.
Construction of hotels, leisure facilities and improvements to transport links will all boost the infrastructure sector, which is forecasted to grow 3.3% in 2017. Meanwhile, the government estimates that the games will generate economic benefits worth USD 12 billion to the South Korean economy.
In spite of internal headwinds South Korea’s fiscal prudence will ensure that sovereign credit risks remain low in the medium term. The country’s debt burden is moderate, with the debt to GDP ratio expected to rise from 39.6% in 2016 to 40.1% in 2017. Meanwhile, the current account has remained in surplus every year since 1997, reaching 7% in 2016. This has allowed South Korea to build substantial buffers to external economic shocks, mitigating country economic risks.
Foreign reserves were around USD 370 billion at the start of 2017, representing more than 8 months of import cover.
The corruption scandal surrounding President Park raises brand and reputation risks for foreign firms operating in South Korea. In January 2016 authorities sought the arrest of Samsung vice-chairman Lee Jae-yong over allegations that the group paid bribes of over USD 36 million to Choi Soon-sil. Although a South Korean court rejected the arrest warrant for Mr Lee on this occasion, companies with business links to the chaebol face the risk of reputation damage if they become embroiled in ongoing corruption investigations.
The increased focus on domestic conglomerates has seen a number of fines levied by the South Korea Fair Trade Commission. In May 2016 two companies affiliated with Hyundai Group were fined USD 1.1 million for conducting illegal business transactions. An anti-graft law implemented in September 2016 aims to reduce corruption risks in the country, but its strict new terms will increase legal and regulatory risks for foreign companies working with government entities. The law applies a limit of around USD 27 on dinners bought for public officials, as well as USD 45 for gifts and USD 95 for donations. Although the government’s long term objective of reducing corruption is risk positive, foreign companies will need to readjust established gifts and entertainment practises in order to avoid regulatory fines.
In this month’s Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for South Africa, Brazil, Kenya and the Democratic Republic of Congo, all of which have been the subject of recent enquiries from JLT’s client base.
Download February Risk Outlook
For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email email@example.com