Trump tariffs pose a higher risk to South Korea’s economic system than home political chaos

Dangers posed by South Korea’s political turmoil to its economic system may subside inside half a yr, however exterior pressures owed to potential tariffs on the nation’s exports to the U.S. are “troublesome,” a key Financial institution of Korea official mentioned.

“We had two presidential impeachments earlier than, and for each instances, the political turmoil or uncertainties have subsided inside three to 6 months,” Soohyung Lee, Financial Coverage Board member on the Financial institution of Korea mentioned Thursday on CNBC’s “Squawk Field Asia.”

It is potential that the political turmoil might not take as a lot of a toll on the nation’s economic system, however the draw back dangers posed by exterior elements are extra worrisome, Lee mentioned.

The potential tariffs proposed by U.S. President-elect Donald Trump “places a whole lot of strain, or perceived strain, for export-driven international locations, together with South Korea,” Lee mentioned.

Not solely would tariffs hit South Korea’s exports, they may additionally reintroduce inflationary forces within the U.S. economic system, which may maintain U.S. rates of interest excessive and the greenback sturdy, in flip impacting the Korean received.

With the Chinese language yuan probably depreciating as properly, these elements may weaken the South Korean received even additional, Lee acknowledged, which could improve volatility within the nation’s monetary markets.

The received was final buying and selling at 1,466.48 in opposition to the U.S. greenback, close to 15-year lows it hit in December 2024.

Regardless that the BOK has coverage instruments reminiscent of “international reserves and coordination with authorities companies like [the] Ministry of Finance,” Lee pressured that “the valuation of the Korean received is decided out there” and the BOK has no particular goal stage for the foreign exchange fee.

Authorities companies will solely step in to “scale back volatility, if wanted,” Lee mentioned.

A confluence of inner and exterior stress on South Korea’s economic system led the nation’s Ministry of Economic system and Finance to forecast the nation’s gross home product progress in 2025 at 1.8%, in contrast with 2.1% projected for 2024.

The BOK in November had minimize its forecast for 2025 to 1.9% from 2.1%

To spice up home demand, the finance ministry will broaden tax exemptions of spending in the course of the first half of 2025, and introduce incentives for corporations that improve wages, Reuters reported.

However for the BOK, “the inflation fee and monetary stability would be the major issues,” mentioned Lee, and “not a lot financial progress per se, if the three goals are conflicting with one another.”

The BOK unexpectedly minimize its benchmark fee by 25 foundation factors to three% in November. The transfer adopted a 25-basis-point discount in October, making it the primary time since 2009 the nation’s central financial institution lowered charges in two consecutive conferences.

South Korea’s inflation fee in November rose to 1.5% yr on yr. It got here in under the 1.7% anticipated by economists in a Reuters ballot, however was nonetheless up from the 1.3% improve within the prior month.

“We’ve got a reasonably sturdy demonstration of the strong economic system for previous 20 years, so I’m cautiously optimistic in regards to the financial circumstances,” Lee mentioned.

— CNBC’s Lim Hui Jie contributed to this report.