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After Impeachment Verdict, Korea’s ‘Fresh Start’ On Reform Begins Again

 
 

Ousted South Korean President Park Geun-hye has left the presidential palace, after being formally removed from office Friday by the Constitutional Court over a corruption scandal. For Asia’s fourth-biggest economy, will Park’s departure deliver the “fresh start” on reform originally promised under her leadership?

Signs of a new beginning were not obvious Friday, at least on Korean financial markets. Despite the political damage from the scandal inflicted on the nation’s powerful “chaebol” conglomerates, with the heads of nine groups questioned and the arrest of Samsung boss Jay Y. Lee, the market barely moved.

Within an hour of the court’s decision to sanction Park’s removal, shares in Samsung and Hyundai were largely unchanged, with LG Group stocks only marginally lower. SK Group shares advanced by 1.2 percent, according to Bloomberg data.

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While the Korea Stock Exchange’s benchmark Kospi index reached a session high after the ruling, it closed the day just 0.3 percent higher, in an otherwise unremarkable trading session.

“An easy conclusion to such a muted reaction would that the market has already priced in any downside from Park’s ouster, and calls to break up the cozy relationship between family-run conglomerates and the political elite,” wrote Bloomberg columnist Tim Culpan.

“That doesn’t seem to be the case, either. The chaebol, which account for 50 percent of South Korea’s Kospi index by market value, have not only risen since before the drama started to unravel in mid-October, but have outperformed the broader market.”

While down 3 percent this year, the Kospi index has advanced by nearly 7 percent since tumbling to a year-low on November 9, at the height of the political scandal. However, it still trades on less than 10 times forward earnings, compared with a multiple of 13 for the MSCI Asia Pacific index, suggesting the market remains undervalued.

Failed Vision

South Korea’s first female president, Park pledged to deliver 4 percent economic growth, 70 percent employment and $40,000 per capita income, a plan nicknamed her “474 Vision.”

Park also vowed to boldly remove regulations to foster investment, increase tax breaks to boost the services sector, and aid the growth of new ventures, while encouraging more female workers amid a looming demographic crisis.

But instead of her “Second Miracle on the Han River,” a reference to South Korea’s rapid economic growth in the decades following the Korean War, the economy instead went backwards during Park’s four years in office.

Exports shrank for two straight years through 2016 and may be further damaged by deteriorating relations with South Korea’s biggest trading partner, China. While economic growth reached 3.3 percent in 2014, it slid back to 2.6 percent in 2015 and 2.7 percent last year, with sub-3 percent growth rates predicted through to 2018, amid weak domestic demand.

Household debt has surged to record levels exceeding 1.3 quadrillion won ($1.1 trillion), spurring concerns over the health of the financial sector. In the labor market, non-regular employees have risen to 30 percent of total workers, while the jobless rate for those aged 15 to 29 has climbed to nearly 10 percent.

South Korea also placed a lowly 116th on the World Economic Forum’s “Global Gender Gap Report 2016,” although it ranked fifth on the World Bank’s latest ease of doing business survey.

However, the headlines on South Korea’s Chosun Ilbo newspaper’s website Sunday were reflective of the general gloom: “Most workers happy to switch to employer’s competitor”; “Salaries in big companies shrink again”; and “Gap between regular and non-regular workers getting worse.”

The newspaper also headlined the fact that “there are now more funerals than weddings in Korea as the birthrate remains at a record low and many balk at the cost of getting married.”

According to Japan’s Nikkei newspaper, younger Koreans have become increasingly pessimistic about their ability to improve their status, such as by joining a prestigious company like Samsung.

In one poll, nearly 60 percent of respondents thought “no amount of hard work would help them climb the social ladder,” the financial daily said. This compared to only 10 percent being similarly pessimistic two decades earlier.

The newspaper pointed to a lack of safety nets, with social welfare spending on employment benefits, healthcare, and housing amounting to just 10 percent of GDP in 2016. This contrasted with Japan’s 23 percent, despite a similarly aging society, with Korea’s spending the lowest among members of the OECD.

With the left-leaning Moon Jae-in leading opinion polls in the race to become South Korea’s next president, the prospects for a new reform push have increased, however.

“The formation of a new administration paves the way for more forceful fiscal measures to be rolled out,” Commerzbank AG analyst Kai Wei Ang said in a report.

AMP Capital Investors’ Shane Oliver suggested Park’s ousting “enables Korea to move on in a more certain fashion. The only thing that makes me a little less sure is how the situation with the North continues to unfold.”

Reform Push?

Moon has stressed chaebol reform as one of his top priorities if elected, specifically mentioning Samsung in his comments.

“Samsung must undergo soul-searching on its anti-market practices and the illicit favors it has gained through its close ties with politicians,” Moon told reporters. “The controlling family does not take responsibility for any wrongdoing although it has total control over group management. This abnormal practice should be put to an end.”

He said he would push reforms to make the decision-making process at Samsung and other conglomerates “more democratic.”

Nomura strategist Michael Na has described the scandal as “a blessing in disguise” for its potential to curb the chaebol’s influence and strengthen minority shareholders’ rights.

“We believe that the corporate law amendment will eventually lead to the restructuring of large conglomerates,” Na told the Financial Times. “If enacted, this law should significantly decrease chaebol control over the board of directors.”

Along with attacking the chaebol, Moon has also pushed for foreign policy changes, including dialogue with North Korea, as well as considering China’s views on the deployment of the U.S. THAAD anti-missile system.

With elections to be held within 60 days, Koreans will not have to wait long before having a new national leader. Yet with the poisoned chalice of soured foreign relations, a troubled economy and a population impatient for reform, the new president cannot expect much of a honeymoon.

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