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

Risks posed by South Korea’s political turmoil to its economy may subside within half a year, but external pressure from possible tariffs on the country’s exports to the US is “worrying”, a key Bank of Korea official said .

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

Political turmoil may not have as much of an impact on the country’s economy, but downside risks from 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 would not only hurt South Korea’s 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 could weigh on the Korean won.

With the Chinese 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.

The won last traded at 1,466.48 against the US dollar, near 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 does not have a specific target level for the exchange rate.

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

The confluence of internal and external stress on South Korea’s economy has prompted the country’s Ministry of Economy and Finance to forecast the growth of the country’s gross domestic product in 2025. is 1.8%, compared to 2.1% projected for 2024.

BOK in November lower your forecast for 2025 to 1.9% from 2.1%

To stimulate domestic demand, the finance ministry will expanding tax exemptions on expenses in the first half of 2025. and introduce incentives for companies that increase wages, Reuters reported.

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

BOK unexpectedly cut its benchmark rate up 25 basis points to 3% in November. The move trailed 25 basis points reduction in Octoberdoing so for the first time since 2009. the country’s central bank cut interest rates in two consecutive meetings.

of South Korea inflation rate in November rose to 1.5% year-on-year. It was below the 1.7 percent expected by economists in a Reuters poll, but was still up from a 1.3 percent increase the previous month.

“We’ve had a pretty strong showing of a stable 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.