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New South Korean president's cabinet nominations delayed by corruption allegations, likely to hinder progress on key policies

Published: 6/12/2017

South Korean president Moon Jae-in addressed the National Assembly on 12 June for the first time since taking office on 10 May.



IHS Markit perspective

Outlook and implications

  • South Korean president Moon Jae-in remains a highly popular president, and his personal support is likely to remain a positive factor for the Democratic Party (DP) in gubernatorial and local elections in 2018.
  • The DP's lack of a majority in the National Assembly is likely to hinder progress on key policies including regulatory reform and effective increases of taxes affection large corporations.
  • Even if tarnished by allegations of corruption, Moon's nominees for key positions are likely to be confirmed by July, as the main opposition Liberty Korea Party instead gears up to elect new party leadership.

Risks

Policy instability; Regulation; Tax increase; Corruption; Government instability

Sectors or assets

All; mainly financial services, telecoms, defence, and security

President Moon Jae-in, elected in May in early elections following the impeachment of former president Park Geun-hye, has the highest-ever approval rating for a South Korean president after one month in office at over 80%. Moon has promised popular policy priorities including corporate governance reform, job creation, and positive engagement with North Korea. However, his main challenge to realising these promises will be in the National Assembly legislature, where his Democratic Party (DP) holds a minority of 120 out of 300 seats. The main opposition Liberty Korea Party (LKP) holds 107, but together the opposition, including the Bareun Party, holds 173; because these two parties in particular used to be the Saenuri Party, they are likely to vote as a block.

Robust policy reform promises

The LKP has vowed to block Moon's supplementary budget. The budget is essential for his policy programme and in particular his plan to increase permanent jobs in the public sector by 820,000 in the next five years, including the following:

  • 174,000 in national security and public safety
  • 340,000 in social services
  • 300,000 irregular workers converted into permanent employees

Moon also plans to expand welfare including through monthly subsidies of following:

  • KRW100,000 (USD88.7589) per month to parents with a child under five
  • KRW300,000 per month for unemployed people aged 18 to 34 and over 65 (if in the bottom 70% of the income distribution)

Women's participation in the workforce is also supposed to be increased through new state-run day-care centres and extended parental leave.

More importantly, Moon aims to reform the chaebeol conglomerates' dominance of South Korea's economy, which partly contributed to Park's impeachment (for example, both she and de facto head of Samsung Group Lee Jae-yong are currently on trial; see South Korea: 6 January 2017: South Korean chaebeol conglomerate leaders' questioning in corruption investigation increases reputational risks for international firms). Abouy 50% of South Korea's stock market value consists of the four-largest chaebeol, Samsung, Hyundai Motor, SK, and LG. He promised to further empower the Korea Fair Trade Commission (see South Korea: 19 May 2016: Fair Trade Commission fines for conglomerate indicate increasing scrutiny of institutional corruption in South Korea). Moon also vowed not to grant any government pardons of chaebeol leaders, which would mainly affect Lee if he is convicted and imprisoned. In addition, preventing chaebeol' from providing financial services or entering sectors constituted primarily of smaller firms would support his promise to protect small and medium-sized enterprises (SMEs). Lastly, minor shareholders would benefit from Moon's pledge to require cumulative voting systems to elect a firm's board of directors (see South Korea: 6 January 2017: South Korean chaebeol conglomerate leaders' questioning in corruption investigation increases reputational risks for international firms).

Also likely to affect corporations are Moon's proposed tax policies: to increase the top rate for personal income tax, reduce large firms' tax deductions, and potentially increase the corporate tax rate. In 2016, the Ministry of Strategy and Finance, and the Korea Institute of Public Finance, published a report stating that between 32% and 49% of individuals and companies did not pay taxes between 2005 and 2015. To reduce the effect of cuts to the tax exemption system, in 2013, the government expanded exemptions for middle-income brackets. In addition, only 38% of large firms, compared with 56% of small firms, paid corporate taxes in 2014 because job-creating projects or research and development (R&D) investment enabled the others to be exempt.

In the security arena, Moon has already suspended the deployment of further elements of the Terminal High-Altitude Area Defence (THAAD) anti-missile system. For military-related construction, "small and informal" environmental assessments are sufficient for sites 330,000 square metres or less; no formal Environmental Impact Assessment (EIA) was consequently made for the 328,779 square metres transferred to the United States Forces Korea (USFK) before the deployment of two rocket launchers, an x-band radar, and other elements that mean THAAD is now operational. However, because the total site promised to the USFK by the Ministry of National Defense is 700,000 square metres, Moon's administration has stated that an EIA must be completed before four additional THAAD launchers currently at a USFK base can deployed to the site. Nonetheless, "the government has no intention to fundamentally change what it has promised under the Korea-US alliance", National Security Office head Chung Eui-yong has said.

Key cabinet positions

While campaigning for president, Moon promised to rid the government of officials guilty of five types of corruption publicly perceived to be rife within the political and economic elite of South Korea: false residence registration, military service avoidance, real estate speculation, tax evasion, and plagiarism. However, five nominees who have had confirmation hearings have recently faced claims that they broke at least one of these. This week, the relevant parliamentary committees are likely to meet again for more confirmations of key positions not yet confirmed.

Government structural reform

Moon's administration will increase the number of government agencies and ministries from 38 to 40 in an attempt to make the government more efficent, including by forming a new Ministry of Small and Medium-sized Enterprises and Start-ups (by upgrading the existing Small- and Medium-sized Enterprises Administration) and creating a new Office of the Minister of Trade within the Ministry of Trade, Industry and Energy. It will also unify technology policy under the National Technology Advisory Committee, chaired by the president. Lastly, the Ministry of Public Safety and Security will be abolished within three years; it was created by then-president Park after the Sewol ferry-sinking disaster in 2014. Two divisions of the ministry, the Firefighting Agency and the Coast Guard, will become separate agencies. The Ministry of the Interior will be renamed the Ministry of Administration and Safety and take over safety policy and disaster management.

Outlook and implications

Moon's administration faces various challenges to enacting its policy agency in government and in the legislature. For example, the Ministry of Science, ICT and Future Planning is not currently legally able to abolish mobile tariff base rates as promised. In addition, the LKP and other opposition parties together hold a majority of seats in the National Assembly and are likely to block any legislation that runs substantially counter to their agenda. This is most likely to affect regulation and taxes that would undermine the chaebeol and their support of South Korea's economy. It will be key for Moon to confirm as many cabinet nominees as possible before July, after which the LKP will have elected new party leadership and is likely to increase its efforts to challenge Moon and the DP. How successful they are and to what extent Moon can maintain his popular support will be important indicators for gubernatorial and local elections in 2018.

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