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

The risks posed to its economy by South Korea’s political turmoil could ease within half a year, but external pressures due to possible tariffs on the country’s exports to the US are “problematic”, a key U.S. official said. Bank of Korea.

“We had two presidential impeachments before, and in both cases, the political turmoil or uncertainties subsided within three to six months,” Soohyung Lee, a member of the Bank of Korea’s Monetary Policy Board, said on “CNBC” on Thursday.Squawk Asia Box“.

The political turmoil may not affect the country’s economy as much, but the downside risks posed by external factors are more worrying, Lee said.

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

Tariffs would not only affect South Korean exports, but could also reintroduce inflationary forces into the US economy, which could keep US interest rates high and the dollar strong, which in turn would impact the Korean won.

Since the Chinese yuan could also depreciate, those factors could further weaken the South Korean won, Lee acknowledged, which could increase volatility in the country’s financial markets.

The won was last trading at 1,466.48 against the US dollar, close to the 15-year lows it 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 in the market” and the BOK does not have a specific target level. for the exchange rate.

Government agencies will only intervene to “reduce volatility, if necessary,” Lee said.

A confluence of internal and external tensions in South Korea’s economy led the country’s Ministry of Economy and Finance to forecast The country’s gross domestic product growth in 2025 will be 1.8%, compared to 2.1% projected for 2024.

The BOK in November had cut his forecast by 2025 to 1.9% from 2.1%

To boost domestic demand, the Ministry of Finance expand spending tax exemptions during the first half of 2025, and introduce incentives for companies that increase wages, Reuters reported.

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

The BOK unexpectedly cut its reference rate by 25 basis points to 3% in November. The move followed a 25 basis point increase. reduction in Octobermarking the first time since 2009 that the country’s central bank reduced rates in two consecutive meetings.

South Korea inflation rate in November increased to 1.5% year-on-year. It was below the 1.7% expected by economists in a Reuters poll, but still ahead of the previous month’s 1.3% rise.

“We have a pretty strong showing of the robustness of the 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.