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

Risks to South Korea’s economy posed by political turmoil may subside within half a year, but foreign pressure over possible tariffs on the country’s exports to the United States is “worrying,” a top Bank of Korea official said.

“We’ve had two presidential impeachments before, and in both cases, the political turmoil or uncertainties subsided within three to six months,” Soohyung Lee, a member of the Bank of Korea’s Monetary Policy Council, told CNBC on Thursday.Squawk Box Asia.”

It is possible that political turmoil may not cause much damage to the country’s economy, but the downside risks caused by external factors are more of a concern, Li said.

The potential tariffs proposed by US President-elect Donald Trump “create enormous pressure or perceived pressure on export-based countries, including South Korea,” Lee said.

Tariffs will not only affect South Korean exports, but could also reinvigorate inflationary forces in the US economy, which could keep US interest rates high and the dollar strong, which in turn could weigh on the Korean won.

With the Chinese yuan potentially depreciating as well, these factors could further weaken the South Korean won, Lee acknowledged, adding to volatility in the country’s financial markets.

The won last traded at 1,466.48 against the US dollar, close to a 15-year low in December 2024.

Although the IOC has policy tools such as “foreign reserves and coordination with government agencies such as the Ministry of Finance,” Lee stressed that “the valuation of the Korean won is determined by the market” and the IOC has no specific target level. for forex rate.

Government agencies will only step in to “reduce volatility if necessary,” Lee said.

The combination of internal and external stress on South Korea’s economy, the country’s Ministry of Economy and Finance forecast The growth of the country’s gross domestic product in 2025 is at 1.8% compared to 2.1% forecast for 2024.

IOC in November lowered his forecast From 2.1% to 1.9% for 2025

The Ministry of Finance will do this to increase domestic demand to extend the tax exemption of expenses Reuters reports that it will introduce incentives for companies that increase wages in the first half of 2025.

But for the IOC, “inflation rate and financial stability will be the main concerns,” Lee said, and “if the three goals conflict with each other, it’s not so much economic growth.”

IOC unexpectedly reduced the benchmark rate rose 25 basis points to 3% in November. The move was made after a 25-basis dam decrease in OctoberIt is the first time since 2009 that the country’s central bank has lowered interest rates in two consecutive sessions.

of South Korea inflation rate in November increased to 1.5% year-on-year. It came in below the 1.7% rate expected by economists in a Reuters poll, but was still higher than the 1.3% increase in the previous month.

“We’ve had a pretty strong showing of a strong economy over the last 20 years, so I’m cautiously optimistic about economic conditions,” Lee said.

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