Economic policies halt amid 1 percent growth crisis

Korea's economy is likely to grow in the 1% range next year, as it did in 2023. The Bank of Korea projected 1.9% growth for next year late last month, while the average growth forecast from eight global investment banks was 1.8%. Growth could be even lower if U.S. President-elect Donald Trump's promise of universal tariffs of 10 to 20 percent on all imports is implemented sooner than expected. Last year marked the first time that Korea's economy grew by less than 2 percent—except during periods of major external disruptions—since the country began its economic development in earnest.

The role of the government has never been more critical as concerns grow that the Korean economy could become trapped in a cycle of low growth, similar to Japan's ‘lost 30 years.’ However, the government's economic policies have stalled following President Yoon Suk Yeol's declaration of martial law and subsequent impeachment efforts. It remains unclear when the government will announce its economic policy direction for the coming year, which is typically released in December. This policy direction outlines the government's strategies and major tasks for the year ahead. It was expected to include measures to revitalize sluggish domestic demand, but reports suggest that the government has lost momentum to push these measures through.

The discussion of next year's budget, which has already missed its statutory deadline, has also stalled. If a budget is not passed by the end of the year, a quasi-budget will have to be created—something that has never been done before. A quasi-budget would severely restrict most of the government's discretionary spending. Two years ago, when delays in passing the budget raised the possibility of a quasi-budget, Choo Kyung-ho, then Deputy Prime Minister and Minister of Economy and Finance, warned that it could “be the onset of an economic crisis.” Prolonged impeachment efforts could mark the beginning of a combination of 1 percent growth and an economic crisis.

The abolition of the financial investment income tax and the deferral of taxation on virtual assets have also become uncertain. The ruling and opposition parties have effectively agreed to abolish the financial investment income tax, which requires investors to pay 20 to 25 percent of their profits in taxes if they earn more than 50 million won annually from stocks, funds, and other investments. However, if the National Assembly fails to amend the law, it will take effect on January 1 next year. A similar situation applies to the taxation of virtual assets. The semiconductor special law, which includes an exception to the 52-hour workweek, has been pointed out as virtually abandoned by the ruling and opposition parties. Meanwhile, the ‘Blue Whale Project,’ aimed at developing deepwater oil and gas fields in the East Sea, is facing setbacks as next year’s drilling budget has been eliminated.

Some foreign media outlets stated that the incident “confirmed‎s that the ‘Korea discount’ was justified.” “Investors will now think of Indonesia, Myanmar, the Philippines, Thailand, and South Korea as the countries in Asia that have imposed martial law,” wrote Forbes, an American business magazine. ‘Korea discount’ refers to the phenomenon of South Korean stocks being undervalued due to geopolitical risks and opaque corporate governance.

It's ironic that President Yoon, who has been actively pushing to eliminate the Korea discount since the beginning of the year, has instead validated its existence. It would now be unsurprising to see the government itself identified as one of the factors driving the undervaluation of the Korean stock market. On Sunday, the economic team emphasized its commitment to “manage the economy as stably as possible.” However, as long as the fallout from the failed impeachment vote persists, few foreign investors will likely trust the government— an entity now seen as a key contributor to the Korea discount.