BMI View: South Korea's president-elect assumes the presidency on February 25. Broadly speaking, Park's policies exude sensibility and pragmatism. The chaebol reforms that were widely promulgated during her presidential campaign are likely to be immaterial, given the adverse economic ramifications they may entail. The planned increase in welfare outlays is likely to be matched by an appropriate rise in revenues, which suggests to us that it will be less onerous on the country's fiscal position. Despite the bellicose attitude that North Korea has been exhibiting, we expect Park to adopt a largely conciliatory posture towards Pyongyang, which may eventually lead to a reacceleration in economic ties between the two Koreas.
South Korea's president-elect, Park Geun-hye, is set to assume the presidency on February 25. The immediate task she faces will be the need to prop up a faltering economy that has been saddled with increasingly burdensome household debts. Park will also have to find a balance between fulfiling her campaign pledge of increasing welfare expenditure and preventing a deterioration of the country's fiscal health. The country's largest conglomerates, chaebols, will also be high on the agenda as she seeks to introduce some form of economic restructuring. With regards to foreign policy, dealing with North Korea's increasingly belligerent attitude is likely to take precedence. We outline below our expectations on what we believe the Park administration is likely to do with regards to a number of key issues.
Chaebols: Clamp Down Purely Rhetoric
We have repeatedly highlighted that the chaebol clamp down that served as a key plank of both presidential candidates' campaigns was likely to be merely a populist pitch and that reform momentum was unlikely to gain any meaningful traction ( see our online service 'Chaebol Reform Unlikely To Push Through', August 27). True enough, such a view appears to be panning out. In the policy roadmap announced by Park's transition team on February 22, 'economic democratisation' was clearly absent from the list of initiatives Park planned to roll out. To be sure, Kim Chong-in, a co-chair of Park's presidential campaign and a strong advocate of chaebol reform, was not assigned any senior position within the government. As we observed during Park's campaign run, her policies were largely growth oriented and consequently, tightening the noose on the conglomerates (which essentially drives Korea's export-oriented economy) was too risky a move to make, especially against the current economic backdrop. In our view, any reform measures, were at worst, likely to take the form of fairer competition laws that looked to prevent the unchecked extensions of the chaebols into unrelated industries, as opposed to breaking them up. Looking ahead, we consequently expect the chaebols to maintain their hold on the economy and do not envision any radical changes to the export-led economic model.
Welfare: Sensible Spending
As we outlined before, South Korea's ageing demographic profile necessitates an increase in welfare expenditure. Having said that, we believe that Park is likely to adopt a sensible approach in upgrading the country's welfare infrastructure. While nothing has yet been set in stone, Park's proposed welfare blueprint appears to be geared towards attaining a relatively equitable distribution between the government and citizens in sharing the rising welfare burden, and does not encourage people from leaving the labour force prematurely. Park's planned increase in welfare expenditure expenditures also appears to be backed by practical plans (such as uncovering the underground economy) to raise government revenues. We consequently believe that the rise in welfare disbursements is unlikely to be too onerous on the country's fiscal position.
North Korea: Greater Economic Ties Possible
Tensions between the two Koreas have been on the rise following the North's rocket launch late last year and the nuclear test in February this year. Despite the North's increasingly bellicose attitudes, we expect Park to adopt a more conciliatory posture towards Pyongyang. Park's 'trustpolitik' doctrine advocates continuous engagement, both economic and political, while maintaining a firm stance against provocations. This deviates sharply from the hardline stance taken by outgoing president Lee Myung-bak, that culminated in a worsening relationship with the North and consequently led to a rapid descent in his popularity ratings. We expect Park to find some form of compromise between the previous administration's uncompromising attitude and the 'Sunshine Policy' (rendering economic aid and use of passive language). Under Park's administration, we could witness a reacceleration in economic ties between the two Koreas, although this is likely to come at a later stage, if and when, the recent uptick in the North's hostilities begins to subside.