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A state think tank has revised the economic growth forecast for this year upward to 4.9 percent from an earlier 4.4 percent, underscoring growing optimism about Asia's third-largest economy. The Korea Development Institute also expects the country's economic growth to accelerate to 5 percent on the back of increased private spending. South Korea's economy has grown 4.8 percent on average for the past five years.
Policymakers have also expressed confidence about robust economic growth, saying geopolitical risks have been reduced following the historic inter-Korean summit earlier this month and progress in the North Korean nuclear disarmament process.
But the hopes of economic recovery may be dashed due to external uncertainties including high oil prices and the local currency's rise against the U.S. dollar.
Western Texas Intermediate oil futures for November delivery settled at a record high of US$89.47 per barrel on the New York market Thursday, up $2.07 from the previous day, as the falling dollar drew new foreign investors and speculators to dollar-denominated energy futures.
The price of Dubai crude oil, South Korea's benchmark, also jumped to $78.20 per barrel Thursday after hitting a record high of $78.59 earlier this week. The Dubai crude price has risen some 40 percent so far this year, dealing a huge blow to South Korea's oil import-dependent economy.
Energy-poor South Korea, the world's fourth-largest oil importer and second-largest gas buyer, is vulnerable to rises in oil prices because it imports almost all of its crude oil requirements, more than 80 percent of which comes from the volatile Middle East. The country imports nearly 900 million barrels of oil per year.
The central Bank of Korea estimates a 10 percent rise in annual average oil prices would chop 0.2 percent off the country's annual economic growth and push the annual inflation rate up by 0.2 percent.
"If the WTI oil price remains over $90 a barrel, South Korea's economic growth would dip by 0.4 to 0.5 percentage point a year," the bank's governor, Lee Seong-tae, told Parliament on Friday.
The bank had forecast the country's oil import price at $64 a barrel, but the average import price for September was $72.54 per barrel, according to the state-run Korean National Oil Corp. Raw material costs soared 5.7 percent in September.
Still worse, the strong won against the U.S. dollar has been eroding the corporate profitability of exporters. The won is trading near a decade high against the dollar on the back of steady capital inflows. The local currency closed at 915.8 won to the U.S. dollar on Friday.
The local currency is expected to rise further as long as more investors expect the U.S. Federal Reserve to cut interest rates again to prevent a sharp slowdown in the world's top economy. The local currency has already gained 23.3 percent against the dollar so far this year since 2004.
A higher won usually hurts price competitiveness in South Korea's exports by making them more expensive and cutting into exporters' earnings. A 10 won gain against the greenback cuts operating profit of the country's biggest company Samsung Electronics by 150 billion won ($164 million) a year.
"The strong won has emerged as the biggest threat against economic recovery, hurting exports and corporate earnings," the Korea International Trade Association said in a statement, calling for the government's intervention.
Exports, which account for some 40 percent of the economy, fell 0.4 percent in September from a year earlier to $29.5 billion, the first decline in more than five years. Analysts warn exports could suffer setbacks if the won remain strong.
"Strong oil prices and the won's appreciation could combine with the slowing U.S. economy to undermine South Korea's economic revival," said Cho Young-moo, an analyst at the LG Economic Research Institute.
