SEOUL – South Korea’s simmering credit risks weighed on construction activity in the last quarter, holding economic growth in check even as exports maintained momentum and adding to concerns for President Yoon Suk-yeol ahead of parliamentary elections crucial to his policy initiatives.

Gross domestic product grew 0.6 per cent in the three months through December from the previous quarter, matching economists’ forecast.

From a year earlier, the economy expanded by 2.2 per cent, the Bank of Korea (BOK) said on Jan 25.

Construction investment took the biggest hit in the period, shrinking 4.2 per cent from the previous three-month period and marking its biggest drop since the first quarter of 2012.

Meanwhile, exports in real terms increased 2.6 per cent, as facilities investment advanced 3 per cent, underscoring the recovery of the manufacturing engine at the heart of the economy.

Higher interest rates have put a strain on South Korea’s credit markets since the BOK began a tightening cycle in 2021 to wage a fight against inflation earlier than most peers in the developed world.

The latest credit crisis involves local developer Taeyoung E&C, and policymakers have urged financial institutions to increase provisioning for losses on construction-related debt.

The latest data may give the BOK confidence it can keep its policy rate at current levels, which the authorities characterise as restrictive.

The outlook for the construction industry is not looking any better in 2024, and a series of elections both at home and abroad are adding to economic uncertainties for South Korea.

The central bank’s reluctance to reduce borrowing costs any time soon even as the United States Federal Reserve signals an early pivot puts further pressure on an economy in which developers play a major role.

“The key is how much exports and facilities investment can help shore up the economy this year as debt issues continue to weigh on construction,” said Mr Chang Jae-chul, an independent economist who has previously worked at KB Kookmin Bank.

Fiscal spending is also likely to be influenced by the outcome of South Korea’s April elections as well as monetary policy, Mr Chang said.

The main opposition Democratic Party of Korea has called for extra budgets, while Mr Yoon has emphasised the importance of fiscal restraint after pandemic-era spending boosted national debt levels.

A win for Mr Yoon would help lower political hurdles for him to reduce wealth taxes, take a tougher stance on North Korea and continue his emphasis on tightening relations with the United States and Japan during the remainder of his tenure that ends in 2027.

Mr Yoon also has drummed up support for a bigger semiconductor cluster in South Korea, in recognition of tech exports as a pillar of the nation’s future prosperity.

Policymakers expect chip exports to rebound in 2024, boosting economic growth to above 2 per cent and underpinning investment.

The US presidential vote in November also looms as a source of uncertainty for South Korea, whose chipmakers have large facilities in China that are subject to technology controls by Washington.

Mr Yoon has made stronger economic and technology ties with the US a centrepiece of his presidency since taking office in 2022. The US in December overtook China as South Korea’s largest export destination for the first time in two decades.

China still remains South Korea’s biggest trading partner and its economic slowdown particularly weighed on exports through last summer, while geopolitical tensions between Washington and Beijing cast a cloud over the semiconductor industry.

Consumption remains weak in China, and South Korean exports to the world’s second-largest economy eked out just 0.1 per cent growth from a year earlier in the first 20 days of January, according to customs office data.

“We expect a modest rebound in exports to China this year,” Pantheon Economics economist Duncan Wrigley said in a note this week. “The upcycle in semiconductor shipments should continue, led by high-end chips for artificial intelligence-related applications.”

The World Trade Organisation has predicted that growth in global commerce will accelerate to 3.3 per cent in 2024 from 0.8 per cent in 2023, while the World Bank projects a 2.3 per cent gain in trade volume, versus 0.2 per cent in 2023.

Meanwhile, South Korea’s private consumption eked out 0.2 per cent growth in the fourth quarter, while government spending was up 0.4 per cent last quarter compared with the previous three-month period.

For 2023 as a whole, the economy expanded 1.4 per cent, in line with an earlier BOK projection. BLOOMBERG