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

Risks to its economy from political turmoil in South Korea may subside within six months, but external pressure from possible tariffs on the country’s exports to the United States is “dangerous,” a key Bank of Korea official said.

“We’ve had two presidential impeachments in the past, and in both cases the political turmoil or uncertainty subsided within three to six months,” Suhyun Lee, a member of the Bank of Korea’s monetary policy board, told CNBC on Thursday.Squawk Box Asia.”

It is possible that the political upheaval may not affect the country’s economy as much, but the risks related to external factors are more worrisome, Lee said.

The potential tariffs proposed by US President-elect Donald Trump “put a lot of pressure or perceived pressure on export-oriented countries, including South Korea,” Lee said.

Tariffs will not only hit South Korea’s exports, they could also reinvigorate inflationary forces in the US economy, which could keep US interest rates high and the dollar strong, in turn weighing on the Korean won.

With China’s yuan also potentially depreciating, these factors could further weaken the South Korean won, Lee acknowledged, which could increase volatility in the country’s financial markets.

It last traded at 1,466.48 per US dollar, close to a 15-year low hit in December 2024.

Although the BOK 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 BOK has no specific target level. for the forex rate.

State authorities will intervene only to “reduce volatility when necessary,” Lee said.

The coincidence of internal and external burdens on the economy of South Korea led the Ministry of Economy and Finance of the country to forecast the growth of the country’s gross domestic product in 2025 will be 1.8% against 2.1% predicted for 2024.

BOK in November lowered its forecast by 2025 to 1.9% from 2.1%

The Ministry of Finance will push domestic demand expand tax credits on spending during the first half of 2025 and introduce incentives for companies that increase wages, according to Reuters.

But for the BOK, “the main concerns will be the inflation rate and financial stability,” Lee said, “not so much economic growth per se, where those three goals conflict with each other.”

BOK unexpectedly lower the base rate by 25 basis points to 3% in November. The move came after 25 basis points decrease in Octoberas a result of which the country’s central bank lowered rates for the first time since 2009 at two meetings in a row.

South Korea inflation rate in November increased by 1.5% year-on-year. It came in below the 1.7% expected by economists in a Reuters poll, but still up from a 1.3% rise in the previous month.

“We have a pretty strong showing of a solid 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.