Cho Dong-chul, president of the Korea Development Institute (KDI), noted, “It is true that the recent political turmoil negatively affects the South Korean economy, but the likelihood of it escalating into a crisis similar to the foreign exchange crisis is limited,” adding, “Even if the impeachment situation is prolonged, the economic impact will not be significant.”
Cho stated this during an interview conducted at the JW Marriott Hotel in Seoul on the 11th.
Cho emphasized, “The current situation is different from the foreign exchange crisis or the global financial crisis,” explaining that “our country has maintained a current account surplus for the past 30 years, and the current net external assets amount to about 50% of the gross domestic product (GDP),” and “the possibility of it leading to a liquidity issue like the foreign exchange crisis is difficult to imagine.”
However, Cho diagnosed that “if political turmoil continues, the volatility of financial markets, including exchange rates and stock prices, could increase,” and noted, “Although the financial market is changing rapidly, this volatility is likely to remain limited and short-term.”
Regarding concerns about decreased international credibility due to the impeachment situation, Cho explained, “The fundamental of our economy is much more stable compared to the past,” and noted, “The domestic and international economic environments are different from the time of the 1997 foreign exchange crisis.”
KDI previously forecasted South Korea’s economic growth rate for next year at 2.0%, the level of the potential growth rate. Regarding this, Cho commented, “We see the potential growth rate as around 2%, but it is undoubtedly moving below 2%,” adding, “The directionality of the potential growth rate declining in the future is important.”
Furthermore, Cho pointed out, “Activating consumption without income support is only temporary.” He explained, “Among countries with an income level similar to ours, there are hardly any with a potential growth rate exceeding 2%,” adding, “In the past, the income levels of advanced Europe and Japan were similar to the United States, but now they remain at about half the level. This gap occurred because the efficiency of the capital market, led by the U.S. stock market, has overwhelmed Europe and Japan.”
Regarding the conflicting domestic market assessments between the government and KDI, Cho stated, “We expected domestic demand to gradually recover from the second half of last year, but it has not recovered as smoothly as we expected,” adding, “The baseline seemed different even when viewing the same indicators.”
Regarding the construction industry outlook, he added, “Recently, the construction industry is passing through its lowest point, but it takes time to reflect in real construction indicators and employment indicators,” noting, “Construction employment is likely to remain difficult until the end of next year.”
Concerning the inauguration of the second Trump administration in January next year, he expressed concern, “Although only negative aspects such as tariffs are highlighted, we must consider positive impacts such as government innovation,” adding, “In a country like ours, which is heavily trade-dependent, the shaking of the free trading system could act as a burden.”
Cho emphasized that “even amidst political confusion, the economy is maintaining stability from a long-term perspective, and we must increase productivity and strengthen the economic foundation through structural reform.”
Regarding the situation where the need for a supplementary budget is being raised after the first opposition-led budget cut was passed in the National Assembly on the 10th, Cho avoided specific comments, saying, “I have nothing to say.” While stating, “Generally, if fiscal expenditures are cut more than expected, it may not be positive for domestic demand,” Cho noted, “Whether there will be a supplementary budget next year depends on too many political variables, so it is difficult to say at this point.”