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

The risks posed by South Korea’s political turmoil to its economy could ease within half a year, but external pressures from possible tariffs on the country’s exports to the US are “problematic”, a key Bank of Korea official said.

“We’ve had two presidential impeachments before, and in both cases the political turmoil or uncertainty subsided within three to six months,” Soohyung Lee, a member of the Bank of Korea’s Monetary Policy Committee, told CNBC’s Thursday “Squawk Box Asia.”

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

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

Not only would the tariffs hit South Korean exports, but they could also reintroduce inflationary forces into the U.S. economy, which could keep U.S. interest rates high and the dollar strong, which in turn would weigh on the Korean won.

Along with the potential depreciation of the Chinese yuan, these factors could further weaken the South Korean won, Lee acknowledged, which could increase volatility in the country’s financial markets.

The won last traded at 1,466.48 against the US dollar, close to a 15-year low hit in December 2024.

Although BOK has policy tools such as “foreign exchange reserves and coordination with government agencies such as [the] Ministry of Finance,” Lee emphasized that “the value of the Korean won is determined by the market” and that the BOK does not have a specific target level for the currency exchange rate.

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

The impact of internal and external stress on South Korea’s economy has led to the country’s Ministry of Economy and Finance prognosis the country’s gross domestic product growth in 2025 to 1.8%, compared to 2.1% projected for 2024.

BOK in November lowered his forecast for 2025 to 1.9% from 2.1%

In order to stimulate domestic demand, the Ministry of Finance will expand consumption tax exemptions during the first half of 2025, and introduce incentives for companies that increase wages, Reuters reported.

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

BOK unexpected reduce your reference rate by 25 basis points to 3% in November. The move came after 25 basis points decrease in Octobermaking it the first time since 2009 that the country’s central bank has cut rates at two consecutive meetings.

South Korea inflation rate in November rose to 1.5 percent on an annual basis. It was below the 1.7% economists were expecting in a Reuters poll, but still higher than the 1.3% increase in the previous month.

“We have a pretty strong demonstration of a strong economy over the last 20 years, so I’m cautiously optimistic about economic conditions,” Lee said.

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