Trump tariffs pose a greater threat to South Korea’s economy than domestic political chaos

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

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

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

The potential tariffs proposed by U.S. President-elect Donald Trump “places a variety of stress, or perceived stress, for export-driven nations, together with South Korea,” Lee stated.

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

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

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

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

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

A confluence of inner and exterior stress on South Korea’s financial 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 cut its forecast for 2025 to 1.9% from 2.1%

To spice up home demand, the finance ministry will expand tax exemptions of spending through the first half of 2025, and introduce incentives for firms that enhance wages, Reuters reported.

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

The BOK unexpectedly cut its benchmark rate by 25 foundation factors to three% in November. The transfer adopted a 25-basis-point reduction 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 rate 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% enhance within the prior month.

“Now we have a reasonably robust demonstration of the strong financial system for previous 20 years, so I’m cautiously optimistic concerning the financial circumstances,” Lee stated.

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