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

Risks posed by South Korea’s political turmoil to its economy could subside within half a year, but external pressures owed to possible tariffs on the country’s exports to the U.S. are “troublesome,” a key Bank of Korea official said.

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

It’s possible that the political turmoil may not take as much of a toll on the country’s economy, but the downside risks posed by external factors are more worrisome, Lee said.

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

Not only would tariffs hit South Korea’s exports, they might also reintroduce inflationary forces in the U.S. economy, which could keep U.S. interest rates high and the dollar strong, in turn impacting the Korean won.

With the Chinese yuan potentially depreciating as well, those factors could weaken the South Korean won even further, Lee acknowledged, which might increase volatility in the country’s financial markets.

The won was last trading at 1,466.48 against the U.S. dollar, near 15-year lows it hit in December 2024.

Even though the BOK has policy tools such as “foreign reserves and coordination with government agencies like [the] Ministry of Finance,” Lee stressed that “the valuation of the Korean won is determined in the market” and the BOK has no specific target level for the forex rate.

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

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

The BOK in November had cut its forecast for 2025 to 1.9% from 2.1%

To boost domestic demand, the finance ministry will expand tax exemptions of spending 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,” said Lee, and “not so much economic growth per se, if the three objectives are conflicting with each other.”

The BOK unexpectedly cut its benchmark rate by 25 basis points to 3% in November. The move followed a 25-basis-point reduction in October, making it the first time since 2009 the country’s central bank reduced rates in two consecutive meetings.

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

“We have a pretty strong demonstration of the robust economy for past 20 years, so I am cautiously optimistic about the economic conditions,” Lee said.

— CNBC’s Lim Hui Jie contributed to this report.