The South Korean economy has opened 2017 on a gloomy note, with the government cutting the economic growth forecast to 2.6 percent at the end of last year.

The vacancy of the state leader since President Park Geun-hye was impeached and the ensuing political uncertainties as to when the next presidential election will take place are cited by economists as the biggest risk to the economy.

On the external front, the anticipated rate hikes by the US Federal Reserve and President-elect Donald Trump’s protectionist stance are likely to weigh on Korea, which is currently suffering from a record-high household debt and falling exports.

With this in mind, The Korea Herald picked some key issues that will likely affect the overall economy in 2017.

Economic democratization

Opposition lawmakers and civic groups are likely to ride on the so-called “economic democratization” moves to put more focus on re-directing wealth, accumulated by conglomerate owners, to the general public.

The election is expected to take place sometime between April and August, depending on the Constitutional Court’s final decision on Park’s impeachment.

Since the influence-peddling scandal broke in October and flared up calls for more transparency in chaebol corporate governance, lawmakers from the opposition Democratic Party of Korea and the People’s Party have proposed more than 10 revision bills that seek to restrict chaebol owners’ control over their subsidiaries and enhance eligibility of outside directors to check the power of chaebol owners.

For example, Rep. Lee Un-ju of the Democratic Party proposed a bill to ban a chaebol family from owning more than a 20 percent stake of their business group’s subsidiaries, instead of the current 30 percent.

Experts agreed that opposition lawmakers would increasingly push more for income distribution than growth, but warned that such moves should not curb deregulation efforts to sustain long-term growth.

“I would more than welcome such ‘economic democratization’ if it means the government spends more on welfare, but the approach should be prudent not to hurt the private market sector,” Oh Suk-tae, economist at Societe General, told The Korea Herald.

Joo Won, a senior economist at the Hyundai Research Institute, said a low 2 percent range growth forecast will limit the room for opposition lawmakers to excessively push for economic democratization.

Corporate restructuring

Whether a new administration will be able to speed up the delayed corporate restructuring in ailing sectors will be another key issue for the Korean economy this year.

Academic and economist critics repeatedly pointed out last year that the government, led by the Financial Services Commission, had almost non-existent measures to effectively weed out unhealthy firms.

The state-run think tank Korea Development Institute President Kim Joon-kyung picked corporate restructuring as the most urgent issue that Korea should immediately address.

“Since the 2008 global financial crisis, the business environment for the shipbuilding sector worsened but we supported the sector (instead of restructuring it). Nonviable firms just sat idle and wished luck,” Kim told a local daily.

“The shipbuilding sector will continue to face challenges due to US President-elect Donald Trump’s protectionist stance. Korea should start from scratch to rightly assess the current situation, which is the basics of restructuring.”


Household debt

With the US Federal Reserve’s rate hike in December, how to curb the growth of already-high household debt will be key to preventing a contraction in domestic demand.

Economists warn that consumers are on course to cut back on their spending due to their reduced disposable income, after setting aside a large portion of their income to repay interests and principals on their financial loans. The contraction in consumption was cited as the most worrisome factor for the Korean economy for 2017, BOK Governor Lee Ju-yeol recently said.

Household debt is expected to grow to 1,500 trillion won in 2017, after exceeding 1,000 trillion won in early 2014, mainly due to fiscal and monetary easing during 2014 and 2015.

“It will not be easy to manage household debt for the next administration because new home buyers last year will continue to take their already-scheduled mortgage loans this year anyway,” Ted Oh, economist at NH Investment & Securities said.

“What I suggest is to find ways to slow down the growth rate of household debt and make sure property bubbles do not burst.”

Oh added that the BOK will find it difficult to raise the base rate because tightening of the monetary policy hits the vulnerable households first with higher interest rates on repayments of their financial loans.


Stagflation

Stagflation, a combination of economic downturn and high inflation, is being cited as a major risk to the Korean economy, especially since prices of fresh food started to surge late last year.

According to data by Statistics Korea, prices of fresh food jumped 15 percent in November from a year earlier, continuing the rising trend from a 21 percent yearly gain in September and 15 percent in October.

Cabbages, green onions and onions, which are the major ingredients of kimchi, spiked 81 percent, 42 percent and 27 percent, respectively in November from a year earlier.

With global oil prices expected to rise in 2017, the economy may face stagflation but it might not be a major risk either, said Joo of the Hyundai think tank.

“Some project oil prices to go up to $60-70 per barrel. In that case, there is a possibility of stagflation,” he said.

By Kim Yoon-mi (yoonmi@heraldcorp.com)