COUNTRY ANALYSIS

(ECONOMIC, POLITICAL AND FINANCIAL RISK ANALYSIS)

COUNTRY: SOUTH KOREA

1. Demographic Profile and Analysis

Since the 1960s, South Korea has become a model of economic and political
development for the rest of the world. Rapid industrialization helped raise living
standards from among the lowest in the world to among the highest, and the East
Asian nation made a successful transition to democracy in the early 1990s.

Korean and English are the only two languages noted as used in South Korea,
and in addition, the ethnicity is listed as homogenous - meaning the population is
over 99% Korean in ethnic background. The median age in South Korea is
approximately 41.8 years of age. Life expectancy is approximately 82.5 years of
age. Physician density is at approximately 2.3 per 1,000 individuals residing in
the country, and hospital beds are at 11.5 available per 1,000 residents.

In brief:

Capital : Seoul
Official language : Korean
Official scripts : Hangul
Demonym : South Korean, Korean
Government : Presidential republic
– President Moon Jae in
– Prime Minister Lee Nak-yeon
Legislature : National Assembly

2. Geographic Profile and Analysis

is officially known as The Republic of Korea and is located in the southern part of
the Korea peninsula, which neighbors China to the west, Japan to the east,
and North Korea to the north. The land area covers 99,392 square kilometers
and has a population of 51.16 million in 2018. The largest city and capital
is Seoul, which has a population of just under 10 million. Under its current
constitution, the state is also referred to as the sixth Republic of South Korea.
The country had its first election at 1948 and operates under a powerful
presidential system.

Land

Relief
 Geologically, South Korea consists in large part of Precambrian rocks (i.e., more
than about 540 million years old) such as granite and gneiss. The country is
largely mountainous, with small valleys and narrow coastal plains.

Drainage
South Korea’s three principal rivers, the Han, Kŭm, and Naktong, all have their
sources in the T’aebaek Mountains, and they flow between the ranges before
entering their lowland plains.

Soils
Most of South Korea’s soils derive from granite and gneiss. Sandy and brown-
coloured soils are common, and they are generally well-leached and have little
humus content. Podzolic soils (ash-gray forest soils), resulting from the cold of
the long winter season, are found in the highlands.

Climate
South Korea’s climate is characterized by a cold, relatively dry winter and a hot,
humid summer. The coldest average monthly temperatures in winter drop below
freezing except along the southern coast.

3. Economic Profile and Analysis

a. Economic Growth- After emerging from the 1950-53 war with North Korea,
South Korea emerged as one of the 20th century’s most remarkable
economic success stories, becoming a developed, globally connected,
high-technology society within decades. In the 1960s, GDP per capita was
comparable with levels in the poorest countries in the world. In 2004,
South Korea joined the trillion-dollar club of world economies.

Beginning in the 1960s under President PARK Chung-hee, the

government promoted the import of raw materials and technology,
encouraged saving and investment over consumption, kept wages low,
and directed resources to export-oriented industries that remain important
to the economy to this day. Growth surged under these policies, and
frequently reached double-digits in the 1960s and 1970s. Growth
gradually moderated in the 1990s as the economy matured, but remained
strong enough to propel South Korea into the ranks of the advanced
economies of the OECD by 1997. These policies also led to the
emergence of family-owned chaebol conglomerates such as Daewoo,
Hyundai, and Samsung, which retained their dominant positions even as
the government loosened its grip on the economy amid the political
changes of the 1980s and 1990s.

The Asian financial crisis of 1997-98 hit South Korea’s companies hard
because of their excessive reliance on short-term borrowing, and GDP
ultimately plunged by 7% in 1998. South Korea tackled difficult economic
 reforms following the crisis, including restructuring some chaebols,
increasing labor market flexibility, and opening up to more foreign
investment and imports. These steps lead to a relatively rapid economic
recovery. South Korea also began expanding its network of free trade
agreements to help bolster exports, and has since implemented 16 free
trade agreements covering 58 countries—including the United State and
China—that collectively cover more than three-quarters of global GDP.

In 2017, the election of President MOON Jae-in brought a surge in

consumer confidence, in part, because of his successful efforts to
increase wages and government spending. These factors combined with
an uptick in export growth to drive real GDP growth to more than 3%,
despite disruptions in South Korea’s trade with China over the deployment
of a US missile defense system in South Korea.

In 2018 and beyond, South Korea will contend with gradually slowing
economic growth - in the 2-3% range - not uncommon for advanced
economies. This could be partially offset by efforts to address challenges
arising from its rapidly aging population, inflexible labor market, continued
dominance of the chaebols, and heavy reliance on exports rather than
domestic consumption. Socioeconomic problems also persist, and include
rising inequality, poverty among the elderly, high youth unemployment,
long working hours, low worker productivity, and corruption.

b. Interest Rates

Bank of Korea keeps interest rate steady at 1.5% The Bank of Korea left
its key interest rate unchanged on Tuesday, with the Monetary Policy
Board voting on Tuesday to keep the seven-day repurchase rate at 1.50
percent

c. Exchange Rate

Exchange rates: South Korean won (KRW) per US dollar -

1,136.7 (2017 est.)
1,160.77 (2016 est.)
1,160.77 (2015 est.)
1,130.95 (2014 est.)
1,052.96 (2013 est.)

d. Inflation
 Inflation Rate in South Korea is expected to be 1.50 percent by the end of
this quarter, according to Trading Economics global macro models and
analysts expectations. Looking forward, we estimate Inflation Rate in
South Korea to stand at 1.90 in 12 months time.

e. Industry Growth
Industrial production in South Korea rebounded 0.9 percent year-on-year in
July of 2018, following a 0.4 percent decline in the previous month and
compared to market consensus of a 0.2 percent gain. Manufacturing output
rose 0.8 percent, compared to a 0.7 percent decrease. On a monthly basis,
industrial production grew 0.4 percent, following an upwardly revised 0.7
percent contraction a month earlier and compared to expectations of a 0.4
percent decrease. Industrial Production in South Korea averaged 8.82
percent from 1976 until 2018, reaching an all time high of 39.40 percent in
July of 1976 and a record low of -25.40 percent in January of 2009.

f. Industry Competition
electronics, telecommunications, automobile production, chemicals,
shipbuilding, steel

g. Industy Leader
The country is among the largest manufacturer of electronic goods as well
as semiconductors, with globally popular brands such as Samsung
Electronics Co. Ltd. and Hynix Semiconductor (SK Hynix Inc.). The
country's automotive industry is highly developed and has a huge capacity
for automobile production.

4. Political Characteristics and Analysis

Political Risk: Low

• President Moon Jae-In promotes liberal policies and enjoys relatively high
popularity, although his Democratic Party lacks a majority in the National
Assembly.
• The president’s policy priorities include bolstering job creation, and raising both
corporate tax rates and the minimum wage, as well as addressing corruption,
which is especially rampant among high-level government agencies.
• South Korea’s legal system is well-established. Contract enforcement is strong
and ef cient, placing the country rst in the world according to the World Bank.
• Protests and demonstrations led by unions can be large, having the potential of
causing disruptions in major cities.
• North Korea and South Korea have recently reached
an agreement to sign a peace treaty and move towards complete
denuclearization, which is expected to remove the major external security risk for
South Korea.
a. Attitude of Consumers in the host country
South Korean consumption behaviour has been increasingly following the
developed economies' consumption patterns. South Korean consumers tend
to be concerned with the brand name and health attributes of a product, but
also seek impeccable after sales service. Tech-savvy Korean consumers
typically research products online, especially through social media, before
shopping and enjoy being well informed when purchasing a product.
Consumers are becoming less concerned with buying products made in
South Korea and are increasingly inclined to purchase non-domestic
products, often at much lower prices.

In recent years, slow growth and high levels of personal debt have made
some South Korean consumers watchful with their spending; however, high-
end luxury shoppers are still spending at elevated rates. South Koreans are
now in the brink of materialism and aspire for lifestyles that are being
portrayed by the media. They are increasingly viewing money as the
representation and sign of success and put greater emphasis on publicy-
visible items because of their attached symbolic meanings and values. Young
South Korean consumers purchase apparel and other fashion items in which
they can use to express their individuality amidst a rather uniform society.
They believe that they can express it using foreing brands with scarcity value.
Increasingly, South Koreans of all ages and genders view their appearance
as something that can be improved through ever developing. Not being
fashionable or not knowing the latest fashion trend is considered negligent,
ignorant and tasteless.

b. Actions of Host government

Moon Jae-in was sworn in following his victory in a May 2017 election to
replace the country's first female president, Park Geun-hye, who was
impeached in an influence-peddling scandal.

Mr Moon, a centre left human rights lawyer who wants a softer stance on
North Korea, said he would work for peace. He said he would be prepared to
visit Pyongyang if conditions were right.

The son of North Korean refugees took office at a time of tensions on the
Korean peninsula, with the US and Pyongyang trading angry rhetoric amid
growing speculation about another nuclear test.

The international mood changed dramatically after talks with North Korea led
to that country taking part in the Winter Olympics in the South.
At a summit meeting in April 2018, President Moon and the North's Kim Jong-
un agreed to end hostile actions and work towards reducing nuclear arms on
the peninsula..

c. Blockage Fund Transfers

i. Foreign owned companies are legally required to open an account

with a korea foreign exchange bank and secure approval from the
same for each transaction
ii. For Most business activities, the foreign exchange bank will accept
overseas remittance of up to US$50,000 per yr with little or no
request for supporting documents
iii. Single transfers exceeding US$10, 000 per transfer will also attract
higher bank scrutiny and requests for supporting documentation
iv. Because the Korean Government is concerned that
cryptocurrencies are used for money laundering or to avoid Korean
capital controls, banks are currently reluctant to approve
international remittances if the funs are derived from cryptocurrency
trading

d. Currency inconvertibility

The lack of convertibility of the local currency has stood in the way of
South Korea’s reclassification into the Morgan Stanley Capital
International’s developed market index.

To Korea’s market oversight authorities, however, allowing local currency

to be exchangeable offshore appears to be the least likely option out of
fears of compromising stability in currency trading.

MSCI Chairman Henry Fernandez has reiterated the stance Monday in

Seoul that Korea, currently included in the MSCI emerging market index,
falls short of meeting the criteria for the upgrade, citing global fund
operators’ views and their calls to revamp the foreign currency exchange
system in the Korean market.

e. War

Following the dismissal in March 2017 of Park Geun-Hye, embroiled in a

corruption scandal, Moon Jae-in (Democratic Party) was elected President
with an economic programme to stimulate growth, initiate social reform
and reduce the influence of the chaebols. After nearly 10 years of a
Conservative presidency, and despite the circumstances of the election,
the transition was smooth.
 However, with only 40% of seats in the National Assembly, the President
may encounter difficulties in passing some laws.

The aggressive attitude of North Korea, which was marked by new nuclear
tests in 2017, will be the chief risk to political stability. Despite Moon Jae-
in’s calls for dialogue, the threats of the Pyongyang regime against Seoul
continue to fly. While visiting South Korea in November 2017, President
Trump reaffirmed the bilateral security alliance between the United States
and South Korea.

The deployment of the US THAAD anti-ballistic missile defense system,

completed in September 2017, illustrates the importance of this support
and the worsening of the North Korean threat. Highly criticised by China,
the installation of this system has been at the origin of a deterioration of
diplomatic relations with the Middle Kingdom.

However, even though China’s position on THAAD has not changed, they
have been in the process of normalizing since the meeting between the
Chinese and Korean Foreign Ministers at the end of October 2017. A few
weeks later, South Korea’s refusal to conduct a military exercise alongside
the United States and Japan appeared to be a sign of South Korea’s
desire to improve relations with China.

2018 January - North and South Korea agree to march under the same flag at
next month's Winter Olympics in South Korea in a thaw in relations.
2018 April - Kim Jong-un becomes first North Korean leader to enter the
South when he meets President Moon Jae-in for talks at the Panmunjom
border crossing. They agree to end hostile actions and work towards reducing
nuclear arms on the peninsula.

f. Inefficient Bureaucracy

Korea is a developed OECD country and a young democracy with a relatively

effective governance structure. It is often described as a very successful case
of state-led economic development and praised for the successful transition
from an authoritarian “developmental state” to a consolidated democracy
since the 1980s. The Asian financial crisis that hit Korea in 1997 and the
election of the first president coming from the opposition in the same year
have been another critical juncture. Since then substantial institutional
reforms have consolidated democracy, strengthened civil rights and improved
the quality of governance.

The country has a well-trained, meritocratic bureaucracy and a largely

independent judiciary. Despite the substantial improvements in transparency,
democratic accountability and prevention of corruption, many problems
remain. Democratic behavior is still not deeply rooted in Korean society and is
often undermined by entrenched hierarchical and authoritarian thinking.
Korean society is divided into competing networks in which personal trust
derives from regional origin and high school/university networks. These
personal networks are grouped around powerful individuals and compete for
influence, power, jobs and public resources. Democratic changes in
governments have ensured that not a single group was able to completely
monopolize power, but the competition of networks has prevented the
emergence of a universalistic attitude oriented towards the common good. In
sum, the distribution of resources is on the border between competitive
particularism and ethical universalism with a general positive tendency since
the beginning of democratization.

g. Corruption

Corruption presents moderate risks for businesses operating or planning to

invest in South Korea. The Criminal Code criminalizes the main forms of
corruption, and the Act on Anti-Corruption and the Establishment and
Operation of the Anti-Corruption & Civil Rights Commission includes a Code
of Conduct for public-sector employees and regulates conflicts of interest and
asset disclosure.

The Improper Solicitation and Graft Act eliminates a requirement to provide

direct evidence between a monetary reward and a favor to secure a
corruption conviction and holds companies liable for their employees’ corrupt
misconduct. Anti-corruption legislation is increasingly enforced in South
Korea. Facilitation payments are prohibited. Strict limits for hospitality and gift-
giving to public officials have come into force. South Koreans recently
witnessed the largest corruption case the country has ever seen. Following
numerous allegations of corruption and influence peddling, ex-President Park
faced impeachment in late 2016 and was, months later, indicted on charges
of bribery, abuse of office and other corruption-related offenses. The scandal
has spread to involve the highest echelons of the conglomerate Samsung as
well.

h. Government Policies and Regulations

The Criminal Code criminalizes bribery in the public and the private sector as
well as several other forms of corruption, including active and passive bribery,
attempted corruption, facilitation payments – at home and abroad
– embezzlement, extortion, bribing a foreign official, money
laundering and abuse of office.

Anti-corruption legislation is increasingly enforced (FitW 2016). Korea’s Act

on Anti-Corruption and the Establishment and Operation of the Anti-
 Corruption & Civil Rights Commission includes a Code of Conduct for
government officials, regulates conflicts of interest and requires high-ranking
officials to disclose their assets and to report gifts received from foreign
entities. The Act introduces severe sanctions for public officials for domestic
bribery and kickbacks, including imprisonment for up to three years and a fine
of up to KRW 30 million or five times the amount received. Other relevant
legislation includes the Act on Preventing Bribery of Foreign Public Officials in
International Business Transactions (implementing the OECD Anti-Bribery
Convention), the Financial Transaction Reports Act, the Proceeds of Crime
Act, the Government Procurement Act and the Act on the Disclosure of
Information by Public Agencies. Whistleblowers in the private and the public
sectors are protected under the Act on the Protection of Public Interest
Whistleblowers which extends to reports on foreign bribery (ACRC, July
2015).

In practice, however, whistleblowers face many difficulties (New York Times,

Nov. 2016). Access the Ministry of Government Legislation for a collection of
South Korean laws in English.

The Improper Solicitation and Graft Act eliminates the need to prove a direct
link between a provided gift or monetary reward and a favor to secure a
conviction of a public official. The Act broadens the definition of a public
official to include teachers in private schools, employees of newspaper and
broadcasting companies, and the spouses of public officials.

The act also holds companies accountable for corruption committed by their
employees. The Act imposes strict limits on the value of gifts to public
officials; USD 27 for meals, USD 45 for gifts, and USD 90
for celebratory occasions. The imposition of these strict limits are expected to
alter the Korean business culture of “jeopdae” (business entertainment)
(Lexology, Sept. 2016). The Act entered into force in September 2016, yet
due to the many changes and vaguely defined terms in the Act, companies
are advised to assess the compliance of their policies with the new Act.

5. Financial Risk Characteristics and Analysis

a. Investments

Investor Registration Card (IRC)

The IRC contains a unique identification number for each foreign investor,
including the investor’s name, date of birth or establishment, nationality and
type of entity (that is, individual, bank, mutual fund, etc.).

Each holder of an IRC is recognised as a separate independent beneficial

owner. The IRC is required in order to open a cash account for securities
investments, a securities safekeeping account with a custodian bank and a
securities trading account with a broker.

Foreign direct investments

Under the Foreign Investment Promotion Law (FIPL), foreign investors,

including foreign companies, foreign funds, etc., can acquire stakes in any
listed or unlisted Korean company.

An IRC is not required for this type of investment.

Safekeeping

Under the “Supervision on regulations of Securities Business”, foreign

investors are required to keep FIPL shares, provided that they are KSD
eligible, with a local custodian at the KSD.

Physical non–KSD-eligible FIPL shares can be held in safekeeping in the

vaults of a local custodian bank. A delivery of shares outside Korea is not
allowed. Exceptions to this are when the Financial Supervisory Commission
approves the delivery and shares are bearer shares under the FIPL
regulations.

Disclosure rules

In addition to the commonly applicable disclosure rules, if the holdings of

equity securities of any Korean company reach 10%, the FIPL investor is
obliged to file a disclosure report with the Ministry of Commerce, Industry and
Energy (MOCIE).

IPO and Lock-up period

After an IPO, shareholders of pre-IPO shares under the FIPL can trade newly
listed shares on the exchange or off-market.

A lock-up period is applied to prevent the largest shareholders and affiliated

persons from making unfair capital gains once the shares are listed. The lock-
up period lasts, as follows:

One year starting from the first listing

KOSDAQ Market: date
Stock Market Division of
KRXS: Six months from the first listing date

Holding restrictions
Foreign investors are allowed to invest in the Korean equity securities market
without any restrictions. The only exceptions are a small number of
companies of national importance and some industries (such as aviation,
communication and broadcasting) where limits ranging from zero to 49.99%
apply.

Exceptions to foreign ownership limits

Foreign investors are, as exceptions, allowed to acquire shares exceeding the

aggregate foreign ownership limit when:

 The acquisition is a direct foreign investment;

 The acquisition is through the conversion of foreign depository receipts
into ordinary shares;
 A Korean investor changes nationality to a foreign nationality;
 A foreign investor treated as a Korean national for investment
purposes is no longer treated as a Korean national;
 Such shares are acquired:
 Through the exercise of rights from securities issued overseas;
 Through the exercise of rights from convertible bonds, bonds
with warrants and exchangeable bonds;
 Through the exercise of rights as a shareholder;
 As a gift or inheritance;
 A foreign legal entity acquires the shares due to a merger;
 The acquisition is allowed by the FSC.

Foreign investors that acquire shares and exceed the aggregate foreign
ownership limits are required to sell the excess shares within three months of
their acquisition and will be restricted in exercising their voting rights. Any
other entitlements, such as dividend payments, corporate actions, bonus
issues etc., remain valid.

Foreign investors that acquire shares and exceed the foreign ownership limit
will be punished by a forced sale of the share, withdrawal of the IRC approval,
or any other measure deemed appropriate by the FSS.

Sanctions against violation of disclosure rules

Under the current regulations, in accordance to the level of the legal breach,
violations of the reporting requirements may be subject to:

 Issuance of a warning letter;

 Limitation of voting rights;
 Administrative order to:
 Sell the shares exceeding the reporting limit;
 Submit correction reports;
  Recommend the dismissal of officers;
 Publicly announce the violations.
 Criminal sanctions of up to KRW 5 million in fines and/or maximum of 1
year imprisonment.

b. Financing
Financial System Risk: Low
• The insurance sector is regulated by the Financial Services
Commission and the Financial Supervisory Service.
• The tax system is well established and broadly attractive for foreign
investment.
• The country bene ts from a large current-account surplus and
consistent status as a net creditor. Despite uctuations, the external
liquidity gap has generally been low and diminishing.
• South Korea’s overall nancial system is sound, according to the
IMF. However, a more prudent scal policy is recommended, to build a
more resilient economy. Labor market in exibility and low female
participation in the workforce are concerns that need to be addressed.

6. Transparency and Corporate Governance

For a long time, Korean businesses have shown a weak level of corporate
governance and inefficient balance sheets. Companies’ profitability has been
weak leading to an important valuation discount. Mr Moon’s election as President
of South Korea last year raised hopes for improvements in both corporate
governance and the geopolitical situation (see 06/06/2017 article: “What's so
interesting about the Korean market?”). Now, after more than a year of his
presidency, what are the indications?
Signs of improvement in corporate governance initiated by the two
biggest Korean groups

Some progress in corporate governance is evident: Samsung Electronics is

continuing to improve the treatment of its shareholders via share buybacks as
well as increasing its dividend. The annual dividend has risen from KRW
420/share in 2015 to KRW 850/share in 2017 and is expected to climb to over
KRW 1,430/share in 2018 – an increase of 340% in 3 years. At the same time,
share buybacks have escalated, from 5,057 billion won in 2015, to 7,971 billion in
2016 and 9,296 billion in 2017, for a total sum of KRW 22,324 billion (over
US$20 billion).

In the last two years, the share price has almost doubled, buoyed by robust
prices for DRAM chips, of which Samsung is the world's leading supplier. It is
also notable that the principal buyer of Samsung shares in recent years has been
the company itself via its massive share-buyback programme while investors
have been net sellers of the share. Consequently, the share tends to be under-
 held by the market (see graph) and is still very weakly valued despite the
company doubling its profits in two years.

Also worth noting is the fact that the company recently increased the number of
independent directors on its board. This represents a real advance in terms of
corporate governance.

Following Samsung's lead, it was likely that Korea’s second-biggest group,

Hyundai, would also embark on reforms. This is a work in progress. The
company has already announced that it intends to simplify its complex
shareholding structure in response to demands from the government and
investors who are calling for a reorganisation to more transparent holding
company structures. It is engaged in various actions to unwind the cross-
shareholding structures between the group’s entities, which give the Chung
family excessive power to the detriment of other shareholders. The activist fund,
Elliott, has seen the value in this and taken a billion-dollar stake in several of the
group’s companies like Hyundai Motor, Kia and Hyundai Mobis. Through its
position as principal investor, Elliott will ramp up pressure on the directors and
other stakeholders regarding governance issues and put forward proposals to
improve the treatment of shareholders. Elliott is seeking the return of more than
12 trillion won to shareholders, mainly via dividend increases and the
cancellation of treasury shares.

However, corporate governance in Korea is not going to be improved overnight.

It will take time, but it is not inconceivable that the country will follow the example
of Japan which embarked on this process a few years ago (see Steve Glod's
24/04/2015 article: “Investing in Japan – An emerging interest in corporate
governance”). Now that the example has been set by the biggest two groups
(Samsung and Hyundai), it is likely that other companies will follow suit.

Korea’s corporate governance will get more interesting this year as local
institutions will have to fully adopt stewardship code. We already note a 47%
increase in proxy vote exercise rate this season and a doubling of dissent rate in
the seven largest domestic asset managers, something that could certainly get
things moving.

7. Country Risk Analysis

a. Macro Assessment of country risk serves as a foundation that reflect the
particular business of MNC
Ranking 11th among the world's largest economic powers, South Korea's
growth over the past thirty years has been spectacular. South Korea is
heavily integrated into international trade and finance and is subsequently
highly vulnerable to external influences. After two years of economic
stagnation GDP growth raised slightly to 3.1% in 2017, due to a rebound in
household consumption, improvement of the real estate sector and fiscal and
monetary stimulus measures. The rebound in international trade and greater
fiscal support are projected to sustain output growth at around 3% through
2019 and 2020.
Thanks to various stimulus packages, public finances have not deteriorated.
The fiscal surplus was consolidated (0.9% GDP), public debt is sustainable
(less than 40% of GDP) and inflation is stable (1.88% in 2017 and is expected
to rise to 2% in the coming years). However, corporate debt represents 110%
of GDP, and the high level of household debt poses a risk to the banking
sector. The 2017 budget, which allocated a record amount to defence, due to
the rising tensions with North Korea, focused on supporting job creation,
health and well-being. The country faces structural problems such as an
underdeveloped financial market, population ageing, dependence on exports
and the decline of the country's competitiveness as Chinese production
moves up-market. However, reduced geopolitical tension on the Korean
peninsula could translate into improved consumer and business confidence.
After a period of particular military tension, both parts of Korea restarted a
dialogue and maintain open communication on matters of common interest,
as shown during the Winter Olympics Games of PyeongChang in February
2018.
South Korean per capita revenue increased from USD 100 in 1963 to almost
USD 30,000 today. Although the unemployment rate has been decreasing
(3.7%) the number of irregular workers is very high, social inequalities are
deepening and social ties are deteriorating. The government plans to create
230,000 jobs in the public sector for 2018 and will urge pension funds to
invest more in small-cap Kosdaq stocks to boost innovation. In the medium
and longer terms, South Korea will spend more on preparing measures to
tackle the low birth rate, elderly poverty and low employment among women.

b. Micro Assessment of country risk as it relates to the specific MNCs

Since 2012, South Korea's economic growth has been rather stagnant due to
both cyclical impacts and a steady decline in the country's growth potential. In
2017, economic difficulties were accentuated by a deterioration in relations
with China, the country's main trading partner. Following North Korean
nuclear tests, South Korea agreed to accept the deployment of the U.S. anti-
missile system on its territory, to Beijing's great dismay. South Korea's
Samsung had to stop producing its Galaxy Note 7 smartphone following
numerous incidents, and the shipbuilder Hanjin went bankrupt. Nevertheless,
South Korea and China renewed their currency swap deal in October 2017.
The 'Choigate' scandal and the vote by the National Assembly to impeach
President Park Geun-hye — accused of corruption, abuses of power and
breaches of her constitutional obligations — led to a political blockage with
strong economic repercussions. Parliament threatened to cancel the budget
allocated to the 'creative economy', a policy believed to have been influenced
by the President's confidante Choi Soon-sil.
c. How country risk assessment varies with the firm industry and project?

“Apart from shipments of semiconductors, exports growth came to a halt

and investment is shrinking,” said Do Kyu-sang, a director general at the
ministry, said in a press conference. “The economy’s capacity to create
jobs is weakening,” Do said.

South Korean policymakers are trying to drive a sustained return to

growth rates that match the country’s potential after a 3.1 percent
expansion last year, the fastest in three years.

The government fears steep minimum wage hikes may choke a labor
market recovery, as businesses cap hiring in a blow to consumer
spending. The hikes also come as exports, which posted stellar growth in
the past year, lose steam amid an escalating trade spat between the
United States and China. On Saturday, the government-mandated
Minimum Wage Commission said the minimum wage will increase
another 10.9 percent next year to 8,350 won ($7.40) an hour, after a 16
percent increase in 2018.

d. Incorporating risk in financial budgeting

The finance ministry on Tuesday called for more than Won470tn

($420bn) in spending next year, up almost 10 per cent from the
Won430tn allocated for the current year and the biggest year-on-
year jump since the aftermath of the global financial crisis in 2009.
As tensions with North Korea have subsided this summer, the
economy has emerged as a top priority for Mr Moon, who amid
sliding approval numbers has demanded his ministers do more to
improve the situation.

e. Impact on a country

The external position is solid. External debt is low and the current account
surplus is large (7% GDP in 2016). The economy has built strong buffers
over the past years including a solid positioning in high-tech sectors and
competitive exporting companies. These ensure a large export base
(goods exports account for USD495bn in 2016). Main factors of
vulnerability stem from a rise of protectionist measures from main trading
partners (China, U.S.), and strong competition from neighboring countries
such as Japan.
 f. Impact on exchange rates, investments and economic growth

Economic Risk: Low

• South Korea has a free market that is heavily export- oriented, which
increases the economy’s vulnerability
to global shifts in demand and changes in trade. Strong global growth
recently has supported the economy. Healthy domestic spending, along
with global oil price increases, should result in a slight increase in in ation.
• South Korea has been successful in reducing poverty, but its aging
population remains a concern. As the labor market shrinks, the
government will have to raise tax rates to maintain revenues or cut
services. Labor market in exibility is another concern the government
needs to address.
• Growth is generally sustainable, however, the standard of living,
education, and social welfare have all improved in tandem with economic
growth.
• Business operations in South Korea bene t from its advanced
infrastructure, especially in key sectors such as communications and
transport. The World Bank’s Ease of Doing Business survey ranks South
Korea 4th in the world out of 190 countries.

g. Country Risk Rating

The Country Risk Tier (CRT) re ects A.M. Best’s assessment of three
categories of risk: Economic, Political, and Financial System Risk.

South Korea, a CRT-2 country, has low levels of economic, political, and
nancial system risk. Its economy and nancial markets are well integrated with
the global economy, and it is a large exporter. Despite a divided government,
politics are largely stable. The recent peace agreement with North Korea has
signi cantly mitigated external security risk.

GDP rose 3.1% during 2017 and is projected to decelerate slightly over the
medium term. In ation is expected to increase slightly, towards 2%, owing to
healthy domestic spending as well as higher global oil prices.

The countries pictured in the map hold a great deal of the world’s economic
potential.

8. Business Outlook

South Korea on Wednesday cut its economic growth forecast for this year, citing
a feeble labor market recovery and global trade tensions. In its bi-annual
economic policy report, the nation’s finance ministry projected growth of 2.9
percent for this year, in line with the Bank of Korea’s projections and down from a
3 percent estimate in December.

With businesses slowing hiring, the government now sees the economy adding
only 180,000 jobs this year, down from 320,000 estimated earlier. To shore up
domestic demand, the government plans to increase fiscal spending by 4 trillion
won ($3.55 billion) within its existing budget by re-allocating money at some of its
state-managed funds to infrastructure projects that create jobs.

However, to avoid running up additional government debt, an official at the

ministry’s budget office said the finance ministry would not sell more treasury
bonds. In its outlook for the second half, the ministry also revised down
projections for this year’s headline inflation to 1.6 percent from 1.7 percent, while
cutting private consumption growth outlook to 2.7 percent from 2.8 percent.