2022-03-10-牛津经济研究院-South_Korea_Victory_for_Yoon_signals_domestic_and_foreign_policy_shifts_3页_191kb

South Korea: Summary of the Research Briefing

Core Content

On March 9, Yoon Suk-yeol of the People Power Party was elected as South Korea's next president in a tight race, securing 48.6% of the votes. His victory signals a shift in both domestic and foreign policy directions, contrasting with the approach of the incumbent President Moon. Yoon will take office in May and serve a five-year term.

Main Policy Directions

Domestic Policy

• Small Government Approach: Yoon advocates for a smaller government and emphasizes the role of the private sector in driving economic growth. His administration is expected to introduce more business-friendly policies, such as deregulation.
• Fiscal Challenges: Despite his preference for fiscal restraint, Yoon has pledged KRW50tn (US$40.7bn) in support for businesses still affected by the pandemic. This may widen the fiscal deficit, which is projected to remain in deficit over the medium term due to rising social welfare and healthcare spending, as well as the need for fiscal incentives to develop new growth engines.
• Housing Affordability: The Yoon administration aims to increase housing supply by 2.5 million homes over the next five years. While easing property taxes may provide short-term relief, it could potentially increase demand and house prices in the long run. A gradual easing of the supply-demand imbalance is expected to improve housing affordability.

Foreign Policy

• Strengthening Alliances: Yoon plans to deepen South Korea's alliance with the US and Japan, and to enhance regional security cooperation. He also intends to join the US-led Indo-Pacific Economic Framework, focusing on trade, digitalisation, supply chain resilience, and decarbonisation.
• Tougher Stance on North Korea and China: Yoon has indicated a more assertive foreign policy toward North Korea, including support for a pre-emptive strike if there is an imminent security threat, and plans to deploy more THAAD missile systems. His approach toward China is also expected to be more confrontational, which could strain already difficult economic and diplomatic relations.
• Economic Risks: South Korea's significant trade exposure to China means a deterioration in bilateral relations could pose growth risks for the country in the coming years.

Key Information

• Presidential Election: Yoon Suk-yeol was elected with a narrow margin, 0.8 percentage points over his Democratic Party rival.
• Legislative Challenges: The National Assembly is controlled by the Democratic Party until 2024, which may hinder Yoon's ability to implement his policy agenda in the early years of his presidency.
• Economic Context: South Korea's economy is facing near-term and structural growth challenges, including a resurgence of Covid cases, inflation, and the impact of the Russia-Ukraine war.
• Fiscal Outlook: While fiscal balance is expected to gradually improve after the pandemic-induced stimulus, it will remain in deficit due to social welfare and healthcare spending. The fiscal deficit is projected to rise in the early years of Yoon's administration.
• Housing Market: House prices have risen sharply during the Moon administration, despite multiple property cooling measures. Yoon's plans to increase housing supply are expected to gradually ease the supply-demand imbalance, benefiting the construction sector and economic growth.
• Inflation and Monetary Policy: Inflation has risen to over 3% y/y, above the Bank of Korea's 2% target. This may force the central bank to continue raising interest rates, creating a challenge for Yoon's fiscal restraint goals.

Conclusion

Yoon's presidency is expected to bring significant changes in domestic and foreign policy, with a focus on reducing government size, boosting private sector growth, and strengthening alliances. However, his administration may face legislative and fiscal challenges in achieving these goals, particularly given the current political landscape and economic conditions. His foreign policy stance, especially toward China, could also introduce risks to South Korea's economic stability.