Yoon Suk-yeol of the conservative People's Power Party (PPP) will become South Korea’s new president when his administration takes office in May of this year. Yoon beat the ruling liberal Democratic Party candidate Lee Jae-myung by less than 250,000 votes in the closely contested election held in March, securing 48.6% of the vote compared to Lee’s 47.8%. However, issues such as South Korea's relationship with North Korea, rocketing home prices, gender inequality, and a decaying job market saw voters disillusioned as they headed to the polls. Ultimately, Yoon's merger with Ahn Cheol-soo, another third-party conservative candidate, united the opposition. So what will this conservative, pro-business administration mean for South Korea's economy and security?
Deregulation of Property and Banking Sectors
South Korea has an extremely high household debt to GDP ratio (around 103%), with families typically holding 18 times their annual wages in debt. Democratic Party practices that favor government intervention have resulted in a sharp spike in the Seoul housing market, putting the country at risk of a housing market crash that would impact the government's ability to service its debts. However, the incoming administration’s policies on household loans are predicted to ease, particularly for loan-to-value limits, which should see aggregate household loan balances rise in the second half of this year.
While large corporations like Samsung, Kia, and Hyundai drive most of the foreign interest in South Korea's economy, most South Korean workers are employed by small and medium-size enterprises. The PPP campaigned to deregulate the banking sector and thus remove barriers to market activity and free up access to capital for businesses. This has won the party the support of businesses that were hard hit by weak and inefficient aid policies during the pandemic. The new administration also pledged to abolish the capital gains tax and maintain good stock market transaction-tax levels, winning support from retail investors.
However, Democratic Party lawmakers currently control the majority in the National Assembly. Their opposition could mean deregulation is delayed until after the 2024 elections, which will be the first opportunity for the conservatives to pick up seats in the assembly. There is a chance government inaction could cost Yoon the support of South Korea's business community and trigger a housing market crash.
A Harder-Line Approach to North Korea
Neither presidential candidate campaigned on reunification with North Korea out of fear of alienating young voters who fear the economic uncertainty that reunification would cause. However, their stances towards the North still contrasted strongly. While Lee argued for easing sanctions to incentivize and reward North Korea’s denuclearization, Yoon insists international sanctions should remain in full until North Korea is wholly denuclearized. It’s expected that North Korea will test his administration’s resolve with further missile tests this year, in violation of international sanctions.
Yoon may seek to delay the military autonomy that the US's decade-long transfer of operational control to the South Korean Armed Forces will give Seoul. Instead, it's more likely he will pursue swift development and deployment of missile defense systems and strengthen his country’s traditional alliances and defense partnerships with the US and Japan. (Japan is South Korea’s former colonial ruler, but recently South Koreans have begun to view the country more favorably than China.) Such systems and aiding US security interests will likely lead to a cooling of relations with Beijing, especially as improved relations between South Korea and Japan would free the US from acting as a bridge between the two nations, leaving it free to pursue other objectives in the region.
A Delicate Balance But Yoon can’t risk alienating Beijing and potentially triggering Chinese coercion in the form of economic boycotts or accelerated customs scrutiny. Chinese exports from South Korea totaled a record $163 billion last year, meaning its powerful neighbor remains South Korea’s most significant trade partner. Previously, when a US missile defense system was deployed in 2017, China shut down tourism to South Korea and banned K-pop entertainment. The current administration also built up relations with Beijing to help maintain its dialogue with North Korea. Now, the Russia-Ukraine conflict means Moscow will potentially act as a new strategic partner in Seoul's outreach to North Korea. So, Yoon must also find a way to maintain and strengthen US ties without alienating President Putin.
Before his election, Yoon said he would meet first with President Joe Biden, then Japanese Prime Minister Fumio Kishida, then Chinese President Xi Jinping, and finally North Korean leader Kim Jong Un. South Koreans and the rest of the world will watch if he maintains this order in the coming months. With a population of only just over 50 million, South Korea punches above its weight in manufacturing and technology exports, and more recently, film, television, and music. But there is growing unhappiness amongst voters, exacerbated by years of Covid restrictions, and Yoon will need to contend with a disillusioned and bitter public.