South Korea. Highlights. Forecast for Korea. 29 Jan 2014

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1 South Korea Highlights GDP surprised on the upside again in Q4 213, growing.9% on the quarter, giving full-year growth of 2.8%. But we still believe that momentum in the economy is not as strong as the headline GDP numbers suggest. Notably, exports from the vital traded sector have yet to move into a sustained upward trend. In addition, the lift from the fiscal stimulus seen in mid-213 is starting to fade construction, a key driver of the economy in the first three quarters of last year, fell in Q4 as the boost from public contracts tailed off. Stockbuilding also delivered another unexpectedly large contribution to growth (.3% points of the.9%) but this is unlikely to be sustained in the coming quarters, as inventory ratios at companies are already at multi-year highs. As a result, we expect a shallower profile for output growth in early as the temporary factors lifting GDP in 213 fall out of the data. But there were some encouraging signs for the economy going forward. Household consumption made another solid quarterly contribution, accounting for.% points of the rise in Q4 GDP. We expect robust growth in private consumption to continue, supported by low inflation, a tight labour market and rising consumer sentiment, with a pick-up from 1.9% growth in 213 to 2.9% this year and 3% in 21. Private non-residential capital spending also surged in Q4, confirming our view that Korea is on the brink of a decisive upswing in business investment if foreign demand picks up. And although export volumes were up a relatively modest.% on the year in Q4, dampened by the still uncertain global background, the outlook for foreign sales should gradually improve in -1 as world trade picks up; this should spur private investment. As a result, we forecast GDP growth will pick up to 3.1% this year and 3.8% in 21. Forecast for Korea (Annual percentage changes unless specified) Domestic Demand Private Consumption Fixed Investment Stockbuilding (% of GDP) Government Consumption Exports of Goods and Services Imports of Goods and Services GDP Industrial Production Consumer Prices Current Balance (% of GDP) Government Budget (% of GDP) Current Account ($bn) Trade Balance ($bn) Short-Term Interest Rates (%) Exchange Rate (Per US$)

2 Special Focus What will drive the recovery in business investment? Business fixed investment has historically been an important driver of South Korean economic growth, but private capital spending has been notably weak since the crisis of Korean business investment is closely linked to corporate profitability and export performance subdued global demand and sagging profit rates account for the anaemic rate of capital formation seen recently. We expect a decisive upturn in corporate fixed investment through -1 on the back of an acceleration in world trade. However, there are risks to this forecast from a strong exchange rate and fundamental uncertainty about the outlook for world trade. Investment has been weak since the crisis Business fixed investment has historically been an important driver of economic growth in South Korea, but it has been notably weak since the crisis of From 2-7, private non-residential investment growth averaged slightly above 7% pa, whereas since 28 it has barely averaged 2.% pa. This has contributed to the overall investment ratio falling below 2% of GDP for the first time since the early 198s. due to sagging profitability The proximate cause of this recent weakness has been a substantial reduction in corporate profitability. The Bank of Korea s Business and Economic Surveys show the allindustry average rate of profit on total assets falling from more than % in the 22-7 pre-crisis period to below 3% in the period. Thus the incentive for Korean firms to invest has been weak since 28. Two particularly notable causes of this decline in profitability are apparent in the manufacturing sector (which accounts for over 3% of GDP). First, capacity utilisation in manufacturing has been sliding since early 211, and is now well below its 2-13 average rate. Thus more of the capital stock has been lying idle, dragging down the aggregate profit rate on total assets. Second, there has been significant weakness in the prices received by manufacturing exporters, with prices falling year-on-year since late-211. This has weighed on the nominal revenues of manufacturers. Real Investment Ratio % GDP Real Investment Ratio Source: National Statistical Office of Korea / Haver Analytics Corporate profitability % Average 22-7 All-industry profit rate on total assets Average Source: National Statistical Office of Korea / Bank of Korea / CEIC 2

3 Capacity utilisation Average 2-13 = Manufacturing capacity utilisation Source: National Statistical Office of Korea / Haver Analytics Export prices Source: National Statistical Office of Korea / Haver Analytics Manufacturing export prices Profits, exports and investment are closely linked This recent picture is illustrative of a more general pattern. Korean business investment is strongly associated with corporate profits and export performance. Profitability determines the incentives for new investment, but also enables firms to use retained profits to finance future investment. And export performance is a key determinant of profitability. Korea is a highly export-oriented economy, with foreign sales accounts for over % of GDP. Thus external demand is a vital influence on rates of capacity utilisation and trends in export prices, especially in manufacturing. The recent softness in utilisation rates and export prices, and thus in profitability, have been the result of weak global trade overall world trade grew by 3% pa in 212 and 213, well below the 2-7 average of about 7% pa. This dependence of investment on the external environment is especially the case for the small- and medium-sized private sector. The large chaebol firms such as Hyundai and Samsung are compelled by the imperatives of competition at the global technological frontier to engage in investment spending regardless of the vagaries of the external outlook. The SME sector however faces greater demand uncertainty and tighter financing constraints, and thus its investment plans are particularly sensitive to prospects for foreign sales. so global upturn in -1 should boost capex Our baseline is for a decisive upturn in global trade through -1. In particular, import growth in Korea s key trading partners is expected to improve substantially. Exports and investment Exports (LHS) Private non-residential investment (RHS) Source: National Statistical Office of Korea / Haver Analytics By 21, the rebalancing process In China should generate an improvement in import growth, particularly of consumer goods. The US recovery now looks to be firmly established, with GDP growth expected to rise above 3% this year and next, increasing demand for imports. Similarly, the Eurozone economy appears to have turned a corner, so imports should stop contracting and recover from a low base. And in Japan, monetary easing will support imports by lifting wage growth and demand for intermediate inputs. Thus overall we forecast a rise in Korean export growth from 4.3% in 213 to 6% in and 8.6% in 21. By restoring corporate profitability, this will support an upturn in private non-residential investment from an estimated.8% contraction in 213 to growth of 4% in and 8.4% in 21. In particular, investment spending should resume at Korea s SMEs. This is a key aspect of our baseline forecast for Korean GDP, which we see firming from 2.8% in 213 to 3.1% in and 3.8% in

4 Real imports of goods and services f 21f China US Eurozone Japan Source : National Statistical Office of Korea / other national statistical agencies / Oxford Economics Exports and investment Exports Forecast Private non-residential investment Source: National Statistical Office of Korea / Haver Analytics but there are downside risks to the investment outlook However, there are a number of risks to our baseline forecast for exports that mean such a strong upswing in capital formation may not materialise. First, the currency has seen substantial upward pressure over the past year due to the highly expansionary monetary policy stance of two of its principal trading rivals, the US and Japan. In our baseline forecast, we expect the Won to ease somewhat against the US$ in as the Fed tapers its asset purchases, and slow its rate of appreciation against the Yen (as has happened so far this year). It is possible however that the Won will prove more resilient than we currently anticipate given the upward pressure from Korea s large current account surpluses (although investor sentiment towards emergers would need to improve for this scenario to be likely). This would hinder exporters, and would thus stymie the requisite recovery of corporate profitability. Second, and more fundamentally, the outlook for global trade is still uncertain. Growth in world trade has been unusually slow over the past two years, barely keeping pace with world GDP. In our baseline, we are forecasting a resumption of world trade growth in excess of global GDP growth from onwards. However, there has been speculation that the recent slowdown in world trade is to some extent a structural phenomenon, rather than merely a cyclical one. If this hypothesis is correct, then any eventual upturn in global trade will be more subdued than we are currently expecting, and thus the weakness in Korean profitability and investment will continue for significantly longer. Korea: Real trade-weighted exchange rate 21=1 14 uncompetitive competitive Source: Bank of International Settlements World: Trade and GDP World GDP World trade Trade-weighted exchange rate adjusted for relative inflation Source: Oxford Economics / Haver Analytics Forecast 4

5 Forecast Overview Boost to GDP growth seen in 213 The economy performed surprisingly strongly in 213, with GDP growing by more than.8% for four successive quarters for the first time since 27, lifting overall growth for the year to 2.8%. However, much of this strength reflected the impact of a substantial fiscal boost; construction was lifted by public contracts and the increase in public employment provided considerable support for private consumption. In addition, stockbuilding made an unexpectedly large contribution to growth in the second half of the year. will fade going into early So the pace of growth is likely to slow in early as these temporary factors begin to drop out of the data. The impact of the government s fiscal stimulus was concentrated in mid-213 and thus will fade, with the boost to construction in particular expected to level off. And high rates of stockbuilding are unlikely to be sustained in the coming quarters, as inventory ratios at Korean corporates are already at multi-year highs which will dampen output in the short term unless sales start to pick up. Additionally, the external situation remains subdued, in turn constraining business confidence. This background is likely to mean that the impetus from exports will be modest in the next few months. Korea: Quarterly contributions to GDP, 213 % quarterly contribution Private consumption Fixed investment Net exports Government consumption Stockbuilding Q1 Q2 Q3 Q4 Source : Oxford Economics / Haver Analytics Korea: Inventory to shipments ratio 21= Source: Korea National Statistics Office / Oxford Economics but a broader recovery will materialise But the economy should gradually gather momentum in -1 in line with the anticipated global recovery. As this feeds through, it should encourage a sustained rise in business investment, prompt firms in the private sector to step up their rate of hiring and thereby spark a more broad-based expansion than in 213. We now forecast that GDP will grow by 3.1% in and 3.8% in 21. Korea: Export volumes and world trade 3 2 Export volumes F'cast Gradual recovery in global trade Chinese growth will be less dynamic in the coming years than in the past decade. This will limit Korean export growth, but improvements in the US and the Eurozone should go some way to compensating for this and enable a modest pick-up in -1. Our measure of growth in Korea s export markets, calculated as a weighted 1-1 World Trade Index Source : Oxford Economics / Haver Analytics

6 average of import growth in its key trading partners, is seen rising to 6.3% this year and 7.1% in 21, from.3% in 213. But there is some downside risk from the large appreciation of the KRW against the JPY over the last year. The value of goods exported to Japan in 213 was around 11% lower than in 212, whereas overall exports were about 2% higher. In addition, a more general appreciation of the KRW since early July 213 pushed the trade-weighted exchange rate to its strongest since before the global financial crisis. There is a possibility that further KRW strength could choke off the expected upturn in exports in -1; however, a surge of pessimism about emerging markets in general has prompted a modest setback in the KRW in the last week or so. As uncertainty fades, machinery investment will pick up Korean machinery investment saw marked weakness in much of 212 and 213. Sagging rates of capacity utilisation, falling producer prices and the highly uncertain state of the world economy led firms to delay capital spending until the outlook improved more decisively. But provided there are no major global shocks, business confidence should begin to rise in -1 in response to signs of an accelerating recovery in the advanced economies. This should prompt a wider range of firms (beyond the country s multinationals) to ramp up investment to ensure that they stay competitive. Rising real incomes and supportive policy provide scope for solid gains in consumer spending with CPI inflation expected to stay low in, at around 2%, employees should continue to experience solid real wage gains, while employment will rise further as hiring begins to broaden out beyond sectors dependent on public spending. In addition, overall macro policy will remain supportive. Although the very large boost from fiscal policy seen in 213 will fade, the government is planning to continue running a budget deficit out to 217. In addition, the central bank is expected to hold its policy interest rate at just 2.% until late, and if anything is likely to be biased towards a further cut given low headline inflation, anchored inflation expectations and the risks posed to an export recovery if the KRW strengthens too much. Korea: Current account % of GDP Current account Invisibles Visibles F'cast Source: Oxford Economics / Haver Analytics Korea: Consumption and investment Investment Consumption F'cast Source: Oxford Economics / Haver Analytics Korea: GDP and industrial production GDP Industrial production Source: Oxford Economics / Haver Analytics F'cast 6

7 Risk Assessment The risks facing the Korean economy are expected to stay fairly stable over the medium term provided the global economy stages a steady recovery and China restrains North Korea from doing anything too reckless. CPI inflation is forecast to remain below the target of 3%, giving the central bank scope to cut interest rates further if the global outlook deteriorates again or the KRW appreciates too far. The country s external position is also more solid than before the 28 global crisis, with a larger current account surplus and a stable external debt ratio (with banks short-term debts considerably lower than in 28, albeit still sizeable). The economy was supported by a major fiscal stimulus in 213 but the scope for further fiscal boost is quite limited given the need to have room for manoeuvre to cope with the huge costs of unification if the North Korean state ever disintegrated. Emerging risks North Korea relations with the North are not quite as strained as in early 213 but the situation is still tense given the North s rocket and nuclear tests, its bellicose rhetoric and the uncertainty of dealing with an inexperienced leader who controls a huge army and stock of weapons. Financial strains while the economy has grown at a surprisingly robust pace in recent quarters, the expansion has been quite narrowly led by the country s leading multinationals, while many small and mediumsized firms have continued to stagnate. As a result, many SMEs are still struggling to meet the heavy debt obligations they built up in the mid-2s. Key risk scenarios US consumer disappoints the Korean economy remains very dependent on the impetus from global trade, so a scenario where the US recovery faltered would have a significant impact. It would not only curb Korean exports to the US but also reduce regional trade flows. GDP growth might be below 2% until 217. Golden age by contrast, a surprisingly fast recovery in the advanced economies would generate sufficiently rapid export growth to encourage a broad range of firms to invest and hire, pushing growth above 4%. Risk index (=no risk, 1=highest risk) South Korea World average Sovereign risk Trade credit risk Political risk Regulatory risk GDP growth CPI inflation Current account balance Government balance Government debt External debt -1 2 Risk warnings Risk scenarios 3 4 Fairly solid outlook provided healthy world trade growth Inflation likely to be below target in Continued external surpluses despite high oil prices Uncertainty about N. Korea limits fiscal flexibility Debt rising but low relative to US, EU & Japan Banks have reduced external debt since the global crisis Impact of scenarios on risk index Maximum impact of scenarios on risk index US consumer disappoints Eurozone slides into deflation Capital flows out of EMs Golden age Impact of scenarios on GDP growth Baseline Capital flows out of EMs US consumer disappoints Golden age Source : Oxford Economics 7

8 Long-Term Prospects Moderate growth of 3-3.% out to 221 Notwithstanding the patchy performance of the economy over the past couple of years, South Korea still maintains a number of its fundamental long-term economic strengths: Links with China though Chinese growth will not be as rapid as in the past, Korea s strong trading relations with China will help maintain the outlook for exports of both consumer and capital goods. Diverse export products and markets Korea has strengths in a wide range of manufacturing products and a presence in many key growth markets. However, South Korea also faces a number of longerterm challenges: Unproductive service sector despite some limited recent progress, the service sector remains relatively undynamic and unable to utilise fully the country s high education standards. Ageing population the working-age population will start to shrink in 216, and fall steadily thereafter. This is likely to be a key factor pushing trend GDP growth below 3% by 222. Korea: Working age population Label Working age population (1-64 years) Source: United Nations / Haver Analytics Potential GDP and Its Components Average Percentage Growth Potential GDP* Employment at NAIRU Capital Stock Total Factor Productivity *ln(potential GDP)=.6*ln(Employment at NAIRU) +.3*ln(Capital Stock)+ln(Total Factor Productivity) Long-Term Forecast for Korea (Average annual percentage change unless otherwise stated) GDP Consumption Investment Government Consumption Exports of Goods and Services Imports of Goods and Services Unemployment (%) Consumer Prices Current Balance (% of GDP) Exchange Rate (per $) General Government Balance (% of GDP) Short-term Interest Rates (%) Long-term Interest Rates (%) Working Population Labour Supply Participation Ratio Labour Productivity

9 Background Economic development On the basis of IMF PPP data, Korea s per capita income relative to that of the US has risen from about 19% in 198 to 6% in 212. Prior to the Asian economic and financial crisis of , GDP growth was particularly rapid, growing by about 9% pa between 198 and This strong growth was led by the manufacturing sector and focused on exports, so encouraging the use of the latest manufacturing techniques. In addition, there was an emphasis on raising education standards and skill levels across the whole labour force. However, growth in the last few years running up to 1997 was inflated by excessive foreign currency borrowing by companies and massive over-investment, particularly of construction. The crisis was not only a shattering blow in the short term but also had major long-term repercussions, prompting the corporate sector to be much more cautious with regard to investment; in 212 the investment share of nominal GDP was 27% compared with 29% in 21 and 38% in In the ten years to 212 average GDP growth was a more modest 3.6%. Structure of the economy Although Korea s ratio of goods exports to GDP (49% in 212) is relatively modest by regional standards, the exports are crucial to the performance of the overall economy. In seven of the ten years from 23 to 212, net exports contributed more than.7% points to annual GDP growth. The export outlook is also critical in determining business investment. This sensitivity to the global trade cycle was clearly shown by the plunge in activity in the final few months of 28 in response to the eruption of the global financial crisis and its numerous repercussions. The reliance on exports is also shown by the fact that in each of the last five years consumer spending has grown more slowly than overall GDP. Indeed, it is not since the early 2s that consumer spending growth has noticeably exceeded GDP growth, and that was associated with a disastrous consumer credit boom. Although the ending of the latter led to temporary deleveraging in 23 and 24, households dependence on debt rose sharply in the years before the global financial crisis and this pattern has persisted during the recovery (partly due to subdued income growth), with the debt to disposable income ratio rising from 116% in 24 to 138% in 27 and 1% in 212. In the years prior to the global financial crisis, much of the growth in investment was concentrated in a handful of very large and very successful export-oriented companies, while investment by small- and medium-sized companies lagged far behind. This pattern of growth discouraged policymakers from making further efforts to ensure that the country s chaebol companies did not exert too much power over the whole economy for fear that such moves might dent investment and export growth. However, the presidential campaign of late 212 was marked by calls for economic democratisation effectively the reduction of the economic and political power of the largest corporations. As a result, some reforms in this area in the next few years seem inevitable. In 212, agriculture (including fishing) accounted for just 2.7% of GDP (gross value added), compared with construction s.8% share (down from over 1% in the mid-199s), and manufacturing s 31.1%, with the remaining 6.4% coming from services, mining and utilities. Balance of payments and structure of trade The country s goods export trade is overwhelmingly centred on manufactured products, although it has a much wider spread of export manufacturing sectors than many of its neighbours. In 212, merchandise exports totalled US$48bn. Of these exports, autos and auto parts accounted for 13.1%, petroleum products 1.3%, semiconductors 9.2%, general machinery 8.8%, petrochemicals 8.4%, ships 7.2%, steel 6.7%, LCD devices.1%, telecoms 4.1% and textiles 2.8%. Meanwhile, exports of services totalled US$111bn in 212, with US$41bn of that coming from credits for transportation services and US$14bn from travel. By contrast, the import structure is very skewed towards industrial materials, fuels and semi-manufactures (64% of total imports in 212, with 3% of the 9

10 total accounted for by crude oil and other fuels), whereas the import of finished goods is quite modest (reflecting the country s competitiveness in many manufacturing sectors and consumers preference to buy Korean goods in many cases). In addition, over 4% of imports are used as inputs for export manufacturing. Another significant development has been the country s ability to benefit from the rise and rise of China s economy. In 2, Korea s exports to China and Hong Kong represented 16.9% of all merchandise exports (sales to the US in that year were 21.8%) but in 212 this combined share had risen to 3.% (and that to the US shrunk to 1.7%). And while clearly a lot of the country s exports to China are used as components in exports to the US and EU, a significant share is dependent on Chinese domestic demand such as investment machinery, ships and cars. Adverse popular reaction to the sale of Korean companies to foreigners, together with a lack of liberalisation in the service sector, has led to generally quite low FDI inflows during the last decade, nearly US$bn in 211 and 212, significantly lower than annual FDI outflows of about US$2bn. Policy Given the concern that North Korea could suddenly unravel, leaving the South with an enormous unification burden, the authorities have traditionally run a conservative fiscal policy. This meant that they had plenty of scope to initiate a large fiscal boost in response to the global crisis at the end of 28. Notwithstanding the latter, general government debt was only 3% of GDP in Q The central bank has followed an inflation targeting system since In 21-12, the Bank of Korea targeted 3% CPI inflation in a tolerance range of +/-1% around this target. However, the target for has been narrowed to 3% +/-.%. Prior to the global crisis, the authorities intervened very heavily in the foreign exchange markets to limit the appreciation of the KRW (and so avoid the export sector becoming uncompetitive). However, the KRW fell very sharply against the US$ during 28 and has yet to recover fully its losses whereas the Chinese, Japanese and Taiwanese currencies are all stronger against the US$ than they were in 27, so the overall threat to Korea s competitiveness is relatively modest despite the ongoing strengthening of the KRW against the yen. Politics Economic development in South Korea in recent decades has not been undermined by the proximity to North Korea s military power. However, fear of uncontrolled change in North-South relations was a key factor behind President Kim Dae-Jung s sunshine policy towards the North, which started in 2 and was continued by his centre-left successor, Roh Moo-hyun. Their emphasis was on trying to encourage the North to take small steps towards a more market-oriented economy, with the hope that these changes would gradually build a momentum of their own and would enmesh the North in a web of peaceful trade. This policy achieved little, with the North making only making very modest economic changes and instead focusing a large proportion of its resources on a nuclear programme, conducting its first nuclear weapons test in October 26. The North s nuclear programme increased the pressure on the international community to get more involved and some progress in the six-party nuclear talks (South and North Korea, the US, Russia, China and Japan) was achieved during 27 when a roadmap for the disabling of the North s core nuclear facilities was agreed. However, while some of the elements of this agreement have been carried out, the North s behaviour has remained hostile perhaps in response to the firmer line taken on North-South relations by the South s President Lee Myungbak of the centre-right GNP party. During 29-1 there was a marked escalation of cross-border and regional tension as Pyongyang tested long-range missiles, conducted a second nuclear weapons test, then (most probably) sank a South Korean warship in March 21 and shelled an island in the South in November. The death of the North s leader, Kim Jong-il, in December 211 and his replacement by his inexperienced son has further ratcheted up the tension on the peninsula, although the South will continue to hope that China can exert some checks on the North. However, despite pressure from China, the North has conducted another nuclear weapons test. 1

11 Data & Forecasts Key Indicators: Korea Percentage changes on a year earlier unless otherwise stated Industrial Unemploy- CPI Equipment Exports Imports Trade Wholesale & production ment Investment US$ US$ balance retail sales (s.adj.) s.adj. % (US$ mn) volume Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Financial Indicators: Korea Percentage changes on a year earlier unless otherwise stated 3mth int. Money Exchange Exchange Exchange Share Reserves Imports rate Supply rate rate rate price Cover % (M2) Won/ avg. Won/$ avg. Won/1Yen avg. US$ Bn Months Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

12 SOUTH KOREA TABLE 1 SUMMARY ITEMS Annual Percentage Changes, Unless Otherwise Specified CONSUMERS TOTAL TOTAL REAL INDUSTRIAL UNEMPLOY- AVERAGE WHOLE COMPETIT- PRODUCER CONSUMER EXPENDITURE FINAL FIXED GDP PRODUCTION MENT RATE EARNINGS ECONOMY IVENESS PRICES PRICES EXPENDITURE INVESTMENT (%) PRODUCT- (28=1) IVITY (C) (TFE) (IF) (GDP) (IP) (UP) (ER) (GDP/ET) (WCR) (PPI) (CPI) YEARS BEGINNING Q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV COPYRIGHT (C), OXFORD ECONOMICS SOUTH KOREA TABLE 2 SUMMARY ITEMS TRADE CURRENT CURRENT GOVERNMENT GOVERNMENT SHORT-TERM LONG-TERM REAL REAL EXCHANGE EXCHANGE BALANCE ACCOUNT ACCOUNT FINANCIAL FINANCIAL INTEREST INTEREST SHORT-TERM LONG-TERM RATE PER RATE PER (WON BN) (WON BN) (% OF GDP) BALANCE BALANCE RATE RATE INTEREST INTEREST US YEN (WON BN) (% OF GDP) RATE RATE DOLLAR (BVI) (BCU) (BCU*1 (GB) (GB*1 (RSH) (RLG) (Note 1) (Note 1) (RXD) (RXYEN) /GDP!) /GDP!) YEARS BEGINNING Q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV Note 1 : REAL INTEREST RATES = Nominal interest rate (RSH or RLG) - % change in CPI COPYRIGHT (C), OXFORD ECONOMICS 12

13 Long-Term Forecast for Korea Annual percentage changes unless otherwise specified GDP Consumption Investment Government Consumption Exports of Goods and Services Imports of Goods and Services Unemployment (%) Consumer Prices Current Balance (% of GDP) Exchange Rate (per $) General Government Balance (% of GDP) Short-term Interest Rates (%) Long-term Interest Rates (%) Working Population Labour Supply Participation Ratio (%) Labour productivity Employment Output gap (% of potential GDP)

14 Key Facts Politics Head of state: President PARK Geun-hye Head of government: Prime Minister JUNG Hong-won Political system: Democracy Date of next presidential election: December 217 Date of next legislative election: April 216 Currency: South Korean won (KRW), floating exchange rate Long-term economic & social development * GDP per capita (US$) Inflation (%) Population (mn) Urban population (% of total) Life expectancy (years) Source : Oxford Economics & World Bank Structure of GDP by output * 212 or latest 211 available year Agriculture 2.7% Source : CIA Factbook Industry 39.2% Location: Eastern Asia, southern half of the Korean Peninsula Services 8.1% bordering the Sea of Japan and the Yellow Sea (CIA Factbook) Source : World Bank Long-term sovereign credit ratings & outlook Corruption perceptions index 212 Foreign currency Local currency Score Fitch AA- (Stable) AA (Stable) Developed economies (average) 74.8 Moody's Aa3 (Stable) Aa3 (Stable) Emerging economies (average) 38. S&P A+ (Stable) AA- (Stable) Korea (South) 6. Structural economic indicators * Current account (US$ billion) Trade balance (US$ billion) FDI (US$ billion) Govt budget (% of GDP) Govt debt (% of GDP) Long-term interest rate Oil production ( bpd) Oil consumption ( bpd) Source : Oxford Economics / World Bank / EIA Source: Transparency International Scoring system 1 = highly clean, = highly corrupt Composition of goods & services exports, 212 Manufactures 7.4% Other goods exports.% Transportation 6.2% Travel 2.2% Other commercial services 8.3% Destination of goods' exports (212) China 24.% United States 1.7% European Union (27) 9.1% Japan 7.1% Hong Kong, China.9% Source : WTO Source : WTO Fuels and mining products 1.% Agricultural products 1.9% 14