South Korea Economy Ailing

A political scandal has sparked massive anti-government protests in South Korea. President Park Geun-hye is facing questions about the financial dealings of an unelected confidante: Choi Soon-sil is accused of using her ties with the president to coerce local firms to donate millions of dollars to non-profit foundations that Choi then used for personal gain. The president has defied calls to step down, but the political scandal is happening at the wrong time for the country’s economy.

South Korean growth slowed to 2.7% in the third quarter of 2016, down from 3.3% in the previous three months. Some of the biggest conglomerates are also in trouble: Samsung’s smartphone recall, a strike at Hyundai Motor, and a major bankruptcy at Hanjin Shipping have hurt production, Aljazeera reported.

Samsung is the biggest South Korean “chaebol”, the country’s giant, family-owned conglomerates that essentially control industry. Samsung alone is responsible for 20% of South Korea’s gross domestic product. Its closest rival is the Hyundai Motor group, but both companies are facing challenges and both are crucial to the country’s growth outlook.

Escalating fears over the leadership vacuum, economic indexes are showing the country’s economy is ailing. Also, a big shift in the global economy is coming after Donald Trump’s upset win in the US presidential election, heralding an end to low interest rates.

In the global financial market, rates are rising over expectations over the Trump administration’s economic boost, forcing South Korea to also come up with policies to embrace change because a widened gap between the US key rate and that of Korea may trigger a massive capital flight out of the country.

The Bank of Korea, however, is cautious in changing its rate because it will affect the household mortgage rate and the nation’s household debt, which is hovering around 1,300 trillion won ($1.1 trillion).

Also, there are calls for the central bank to cut its rate to boost the economy.

Against this backdrop, however, the government finds itself drifting in establishing next year’s economic policy direction, which is set to be announced next month. Setting up the year’s economic policy direction is led by the ministry and orchestrated by other government financial arms.

“In order to set up policies, there has to be a big picture in political direction,” said a government official asking not to be named. “However, there is a huge vacuum in leadership which should set the direction.”