AXA IM's Aidan Yao discusses the challenges Moon Jae-in faces after winning the South Korean presidential election
Aidan Yao, Senior Emerging Asia Economist at AXA Investment Managers (AXA IM), discusses the challenges Moon Jae-in faces after winning the presidential election:
- Election result confirmed Moon Jae-in as the 19th president of South Korea
- Even with a sizeable win, governance won’t be easy without a majority in the parliament
- Domestic economic policy will focus on fiscal expansion and chaebol reform
- Pursuing diplomacy with North Korea won’t be easy, and may harm Moon’s popularity
- Repairing relations with China will be challenged by the Terminal High Altitude Area Defense (THAAD) deployment; postponing it may anger the US
- Overall, calmness in Korean politics has been restored, but the challenge for Moon has only just begun
- Tepid market reaction to Moon’s victory as the result had been well priced in
“As anticipated, Moon Jae-in was elected the 19th president of South Korea, securing 41.1% of votes in the presidential election. The results were in line with recent polls and consistent with market expectations. Given that significant optimism had already been priced in, with Korean won and equities gaining strongly after the impeachment of Former President Park, reaction to Moon’s victory was fairly tepid so far.
“Given the non-traditional transition of power – due to Park’s impeachment – Moon has effectively no interim period for preparation and will have to hit the ground running straightaway. As the new president, Moon faces plenty of challenges from rising geopolitical tensions in the Korean Peninsula, souring relations with China (due to the THAAD deployment), and a sluggish domestic economy. Making the matter worse, even though Moon has won an impressive 41.1% of votes in the election (almost double that of the runner-up), his Democratic Party of Korea (DPK) still lacks a majority in the National Assembly, controlling only 119 of 300 seats. This will make passing bills on controversial issues, such as reforming the chaebols (Korea’s large, family-controlled conglomerates) or changing foreign policies (particularly vis-a-vis North Korea) difficult, without cooperation with other parties.
“Nevertheless, below are three key policy areas that we think the new president will focus on:
1. “On domestic economic policies, Moon has pledged to increase fiscal spending and pursue chaebol reforms. On the former, Moon has proposed to double the annual fiscal expenditure on social welfare, from 3.5% to 7% of GDP, to redistribute wealth towards the underprivileged. On the more difficult chaebol reform, Moon led the drafting of a few reform bills last year. That effort will likely continue now as he gains more legislative power as president. However, as we noted previously, chaebols are powerful entities in South Korea both economically and politically, and their resistance to change has made many previous reform attempts fruitless. How Moon can succeed this time without backfiring on himself or creating large economic spillovers (e.g. unemployment) is unclear.
2. “On national security, how to deal with the increasing aggression from North Korea will be a key focus, but quite frankly, even as the South Korean president, Moon does not have much swaying power on the matter. As a decedent of North Korean refugees, Moon has taken a more liberal stance towards the North and has even expressed a desire to switch back to the “Sunshine Policy” centered on diplomacy and peaceful dialogues. However, his stance is not widely appreciated in the Korean public, or even within the DPK. Hence, advancing such a controversial change may cost his popularity and political capital. Even if he is successful in bringing the party and the public on board with his plan, convincing the US to switch gears will be difficult without Pyongyang first showing a tangible concession. The reality is that even though South Korea is a deeply-involved party in the Korean conflict, it probably has the least swaying power in determining the outcome (compared to the US, China and North Korea).
3. “The key challenge on foreign policies will be repairing Korea’s relation with China, which turned sour due to the deployment of THAAD. Moon has vowed to have more public debates on the matter and take it through National Assembly voting, which is more likely to postpone the deployment, instead of dismissing it. Beijing understands that given THAAD is already in Korea, the chance of terminating the project is remote. Hence, a postponement of the deployment should be enough to mitigate tensions with Beijing. However, that move won’t be perceived well by the US. How to balance the interests from both sides will require a lot of political intelligence from Moon and his team.”
Notes to Editors
Source: All data from AXA IM as of 12 May 2017.
Tuulike Tuulas +44 20 7003 2233 - Tuulike.Tuulas@axa-im.com
Amy Butler +44 20 7003 2231 - Amy.Butler@axa-im.com
Jayne Adair +44 20 7003 2232 - Jayne.Adair@axa-im.com
Jess Allum +44 207 003 2206 – Jessica.Allum@axa-im.com
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