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South Korea Faces Challenges and Change

South Korea’s new president has inherited a host of domestic and external challenges—whether he can make good on his campaign promises remains to be seen.

For many of the voters, Moon Jae-in was the antithesis of President Park Geun-hye, who was impeached and removed from office in March. His victory shifted the country away from decades of conservative rule to a more liberal approach. Regardless, however, he has inherited numerous challenges.

“On the economic front, South Korea has to deal with weak global trade growth, high household debt and an aging population,” according to Euler Hermes’s May 10 Weekly Export Risk Outlook. “On the geopolitical front, tensions with North Korea have escalated rapidly. And relations with China—its main trade partner—have deteriorated since South Korea sided with the U.S. to improve its defense capability.”

Leading up to the May 9 election, newly elected president Moon Jae-in promised to clean up corruption, promote small- to medium-sized enterprises (SMEs) and reform conglomerates (chaebols), boost near-term growth via fiscal stimulus, create jobs and improve relations with North Korea.

His victory will provide “policy momentum and fresh political capital,” but he still faces “a difficult parliamentary dynamic, at least until the next parliamentary elections in 2020,” according to a new Economist Intelligent Unit whitepaper, South Korea: Making up for Lost Time. The new government currently lacks a strong majority in parliament, the EIU explained.

Although the EIU doesn’t foresee a major attack against family-controlled business conglomerates, it does expect Moon Jae-in to make inroads with reforms “with a host of amendments to the Monopoly Regulation and Fair Trade Act beefing up the regulatory framework around the chaebol and its enforcement.” Striking a balance between new drivers of growth and supporting SMEs, while not hurting export-oriented conglomerates, will prove more of a challenge, the paper notes.

Euler Hermes expects GDP growth to “remain resilient” at about 2.5%. The country’s export outlook, however, remains mixed due to the risking tensions with China, it noted.

 

 

Tightening Race in the U.K.

Chris Kuehl, Ph.D.

The election that was called by Prime Minister Theresa May was thought to be an easy one for the Conservative Party, and for weeks it held a major lead. In the last weeks, however, the polls have started to tighten with the Labor Party gaining support.

Polls have been all over the place, but as the election looms, it appears that the Tories will still emerge victorious. As with every election, many issues are motivating the voters, but the Brexit decision remains top of mind for many.

The decision has been made, and there is no chance of a reversal. The actual process, however, remains to be determined. The May position has been more severe because she has been facing the opposition from Europeans who remain angry at the decision.

The divisions between Conservative and Labor are as stark as ever. Manifestos have been issued by the two parties, and they have little in common—with the Labor position farther to the left than has been the case in previous decades and the Tory position settling further to the right.

The parties that are in the middle are not a factor this election, and that has many anticipating a great deal of acrimony regardless of the outcome. It is likely that Tory control will erode somewhat even as it holds power.

The Labor Party will gain seats in Parliament, but it may soon face a set of decisions as well. The big question is whether the left-wing approach will be able to deliver an overall success in the future or does the approach perpetuate the Labor Party as a semi-permanent opposition party.

The Brexit issue will remain very important into the future as the provisions start to take shape. It is not yet clear whether the sides will compromise.

 

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Russian Economy Improves Slightly

Growth prospects for the Russian economy have shifted into positive territory after two consecutive years of contraction.

The Russian economy grew in the fourth quarter of 2016 and is expected to continue doing so this year. “The economy is exiting a two-year recession that, thanks to the authorities’ effective policy response and the existence of robust buffers, proved shallower than past downturns,” the International Monetary Fund (IMF) said. The organization improved its economic forecast for the country to 1.4%, up slightly from the 1.1% it estimated in October. It expects inflation to slow to the central bank’s target of 4%, due to the ruble’s appreciation and weak consumer demand.

Structural bottlenecks and the lingering effect of sanctions will conspire to subdue mid-term growth, it said. The IMF recommended a series of fiscal, monetary, financial sector and structural policy reforms to promote new growth.

Credit insurer Coface estimates a 1% increase this year following -2.8% in 2015 and -0.2% in 2016, according to its May publication, Russia—from recession to recovery, but to what extent and how fast? The country’s efforts to diversify its economy, due to an ongoing slump in oil prices, have been met with some challenges, such as a shortage of manpower and lack of investment, the firm noted.

“The political situation, both national and international, as well as structural and cyclical constraints, are not conducive to change, and conditions for an upturn in activity seem far away,” Coface noted. Some sectors (agri-food and chemicals), however, were expected to benefit from an upturn in business.

Overall, “Russia must find means to increase its competitiveness,” the firm said. In particular, the country must improve the use of production facilities and work productivity.

 

Election Calendar

June 8 – U.K., British House of Commons
June 11 – France, National Assembly of France
June 18 – France, National Assembly of France (second round, if needed)
June 24 – Papua New Guinea, National Parliament of Papua New Guinea
June 26 – Mongolia, President
July 2 – Senegal, Senegalese National Assembly
Aug. 4 – Rwanda, President
Sep. 11 – Norway, Norwegian Parliament
Sep. 23 – New Zealand, New Zealand House of Representatives
Sep. 24 – Germany, German Federal Diet
Oct. 10 – Liberia, President
Oct. 10 – Liberia, Liberian House of Representatives
Nov. 19 – Chile, Chilean Chamber of Deputies
Nov. 19 – Kyrgyzstan, President
Nov. 19 – Chile, Chilean Senate
Nov. 19 – Chile, President
Nov. 26 – Honduras, Honduran National Congress
Nov. 26 – Honduras, President

 

Global Roundup

Growth slowdown challenges India’s hawkish central bank. A surprise slowdown in Indian growth along with record-low inflation has thrown the central bank’s hawkish monetary-policy bias into question, with some economists suggesting an interest rate cut may be back on the table. GDP expanded by 6.1% in the January to March quarter, the slowest in two years and undershooting economist’s forecasts in a Bloomberg survey by a full percentage point. (Business Mirror)

EU to block U.S. attempts to cut bilateral trade deals with members. The head of the European Commission accused the U.S. government on May 31 of seeking bilateral trade deals with individual member states and said he would block any such attempt to break the bloc’s unified position on trade. (EurActiv)

Here's what market analysts are saying about U.K. election polls. The prospect that the Tories' lead over Labour may be narrowing has jolted the currency markets. Investors factoring in the possibility that it will be a weakened or even coalition government confronting EU negotiators in upcoming Brexit talks helped the pound drop to a five-week low at one point on May 31, after a YouGov Plc study in The Times showed Theresa May’s Conservative Party could fall short of a parliamentary majority. (Bloomberg)

Colombia's peace agreement can give fillip to inclusive growth. The implementation of Colombia’s peace agreement, together with the government’s structural reform agenda, should help support more inclusive growth over the medium term, the IMF said in its annual assessment of the Colombian economy. (IMF)

Brazil exits recession with fastest growth rate since 2013. Brazil's economy emerged from its worst recession on record with its fastest growth rate in nearly four years, data showed on June 1, boosting President Michel Temer's case for staying in office as he battles a corruption scandal. Brazil's GDP grew 1% in the first quarter from the preceding one, matching economists' forecasts for the biggest rise since the second quarter of 2013. (Reuters)

After Trump's visit, Saudi Arabia hopes to reinforce its influence in the region against Iran. U.S. President Donald Trump’s visit to Saudi Arabia and his “Islam speech,” delivered at the Arab-Islamic-America Summit in Riyadh on May 21 created controversy in the Muslim world. Iranian President Hassan Rouhani criticized the visit as “just a show,” while Gulf Arab leaders saw it as a pivot away from the Barack Obama administration’s Middle East policy, which was perceived by some as pro-Tehran. (EconoTimes)

Vietnam’s free trade pitch to the U.S. It was trade, not China's maneuvering in the South China Sea, that was top of the agenda when Vietnam’s Prime Minister Nguyen Xuan Phuc met U.S. President Donald Trump on May 31 in the first visit by an ASEAN leader to Washington under the new administration. It was a slightly surreal affair with Phuc, leader of a communist state, on a mission to promote free trade to the leader of the U.S. (The Interpreter)

South Africa’s unemployment hits 14-year high as recession looms. South Africa’s unemployment rose to its highest in 14 years in the first quarter as agriculture and informal sectors shed jobs and more people stopped looking for work, in a sign the economy may be headed for recession. Unemployment climbed to 27.7% of the labor force in the first quarter, the highest since September 2003. (CNBCAfrica)

China factories hum in shadow of debt risk, Moody’s raises global outlook. China’s industrial engine cranked up again in May, reassuring investors worried about slowing growth in the world’s second-biggest economy as it grappled with debt risks and tried to shake off a stinging ratings downgrade from Moody’s. Moody’s sees an improving global outlook even as it warned of a slowdown in China later in the year as liquidity-tightening measures take effect. (HSN)

Mexican central bank's No. 2 says hiking cycle may not be over. Bank of Mexico Deputy Governor Javier Guzman said on June 2 that it was "impossible to say" whether the bank's rate hiking cycle was over after last month's surprise 25 basis point increase that brought the country's overnight interest rate to 6.75%, its highest level since March 2009. (Reuters)

 

Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations