SEOUL: South Korea’s simmering credit risks weighed on construction activity 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 expanded 0.6% in the three months through December from the previous quarter, the Bank of Korea (BoK) said.

       It was the same pace as in the July-September period, and the figure matched the consensus forecast. From a year earlier, the economy grew by 2.2%.

       Construction investment took the biggest hit in the period, shrinking 4.2% 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%, as facilities investment advanced 3%, 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.

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

       “This should give the BoK room to keep its tight policy rate on pause for an extended period, so it can fight the last mile of its campaign against inflation and curb excessive leverage,” said economist Hyosung Kwon.

       The outlook for the construction industry isn’t looking any better this year, 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 anytime soon even as the 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 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, Chang said.

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

       A win for 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.

       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 this year, boosting economic growth to above 2% 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. — Bloomberg