South Korea's Economy Faces Greater Threat from US Tariffs than Internal Political Instability

South Korea's political unrest may recede within six months, but looming tariffs on its exports to the U.S. pose a significant concern, according to a senior official at the Bank of Korea.

Historically, South Korea has endured and moved past political upheavals, as noted by Soohyung Lee of the BOK's Monetary Policy Board. These incidents typically resolved within a few months, he stated during a CNBC interview.

While domestic turbulence might not severely impact the economy, external risks, particularly potential tariffs, are more pressing, Lee asserted.

Tariffs suggested by U.S. President-elect Donald Trump could heavily burden South Korea's export-reliant economy, Lee highlighted.

Tariff implementations could harm South Korean exports, introduce inflationary pressure in the U.S., sustain high interest rates, and strengthen the dollar, all of which would affect the Korean currency negatively.

The possibility of a depreciating Chinese yuan adds complexity, compounding volatility and potentially further weakening the Korean won, according to Lee.

Recently, the won was trading at 1,466.48 per U.S. dollar, close to the lowest point in 15 years, last seen in December 2024.

Despite available measures like foreign exchange reserves and government collaboration, Lee highlighted that the won's valuation is a market-driven factor, with no specific exchange rate target.

Government intervention will focus on curbing excessive volatility, Lee mentioned.

Amidst the internal and external challenges faced, South Korea's Ministry of Economy and Finance adjusted its GDP growth forecast for 2025 to 1.8%, a decrease from 2.1% for 2024.

The BOK also revised its growth forecast to 1.9% in November 2025, down from 2.1%.

To stimulate the economy, the ministry plans to inject funds and offer wage increase incentives to businesses in early 2025, as reported by Reuters.

The Bank of Korea prioritizes inflation management and financial stability over mere economic growth, especially if these goals conflict, Lee explained.

In an unexpected move, the BOK reduced interest rates by 25 basis points to 3% in November, following a similar cut previously—a scenario not seen since 2009.

Inflation in South Korea increased to 1.5% annually, lower than the anticipated 1.7% as per a Reuters poll, but an increase from 1.3% the month before.

Despite these challenges, Lee remains cautiously optimistic about South Korea's economic health, citing the strong growth trajectory over the past two decades.