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

The risks posed by South Korea’s political turmoil to its economy may subside in half a year, but external pressures due to possible tariffs on the country’s exports to the United States are “difficult ,” said a key Bank of Korea official.

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

It is possible that the political turmoil may not take a toll on the country’s economy, but the negative risks posed by external factors are more worrying, said Lee.

The potential tariffs proposed by US President-elect Donald Trump “put a lot of pressure, or perceived pressure, on export-led countries, including South Korea,” Lee said.

Not only would the tariffs hit South Korea’s exports, they could also reintroduce inflationary forces into the US economy, which could keep US interest rates high and the dollar strong, in turn affecting the twenty Korean

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

The won was last traded at 1,466.48 against the US dollar, close to the 15-year lows it reached in December 2024.

Although the BOK has policy instruments such as “foreign reserves and coordination with government agencies such as [the] Ministry of Finance,” Lee stressed that “the valuation of Korean wine is determined in the market” and the BOK does not have a specific target level for the forex rate.

Government agencies only intervene to “reduce volatility, if necessary,” Lee said.

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

The BOK in November he had cut his forecast by 2025 to 1.9% from 2.1%

To boost domestic demand, the finance ministry will expand tax exemptions on spending during the first half of 2025, and introduce incentives for companies that increase wages, Reuters reported.

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

The BOK unexpectedly cut their referral rate by 25 basis points to 3% in November. The move followed a 25 basis point reduction in Octobermaking it the first time since 2009 the country’s central bank has reduced rates in two consecutive meetings.

South Korea the inflation rate in November it increased to 1.5% year on year. That came in below the 1.7% expected by economists in a Reuters poll, but was still above the 1.3% rise in the previous month.

“We’ve had a pretty strong showing of a robust economy for the past 20 years, so I’m cautiously optimistic about economic conditions,” Lee said.

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