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The South Korean economy has been significantly affected by the events of 2008 and early 2009 and while we note the emergence of cautious signs of optimism as 2009 has progressed, we still believe that recovery for Korea will be an uneven affair. We consequently maintain our forecasts for a contraction of 3.3% in FY09 with gradual expansion in 2010 of some 1.8% The government in Seoul is pinning its hopes on the country's defence industries boosting the economic recovery and revealed that it plans to spend at least 60% of its budgeted defence expenditure in the first half of the current fiscal year. It also expects to spend even more than 60% of the ministry's budget in 2010 on domestic purchases that may stimulate growth.
Tension between the country and Pyongyang remain the dominant security issue on the South Korean horizon and a significant challenge to President Lee Myung-bak and his ruling Grand National Party (GNP) administration. President Lee also faces ongoing dissatisfaction over many aspects of his domestic government. However, we do not see this significant affecting policy in the short-to-medium term and, despite criticism from some sections of society, the GNP maintains considerable legislative clout due to its wide majority.
It is too early to make any definitive judgment on recent tentative signs of headway in the US-North Korean relationship, confirmed in speeches by US Secretary of State Hillary Clinton in October 2009, nor to forecast with authority how this may play out as far as South Korea is concerned. Nevertheless, it does appear that, following its nuclear and missile tests in May, North Korea appears to be taking a softer line towards all its external relationships – a development which may have resulted from a change in approach by the new Obama administration in the US, which now appears willing to hold bilateral talks.
Set against this, other potential flashpoints with North Korea still exist, most notably in the West Sea where Pyongyang continues to refuse to recognise the Northern Limit Line (NLL) – the maritime border separating the two Koreas. This has been the spark for previous naval clashes (in 1999 and 2002).
South Korea Defence and Security Report Q4 2009: http://www.companiesandmarkets.com/r.ashx?id=XA4HG14K8168907
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