As the crisis engulfing South Korea’s president Park Geun-hye comes to a head, experts have raised concerns over the health of the country’s struggling exporting base.

The economy is set to grow at 2.5% next year, down from the 3.5% average in the years following the financial crisis.

Now, with global demand weak, Korea is facing structural issues: in 2015, merchandise exports amounted to 40% of GDP, compared to almost 20% in China and Indonesia, and not even 15% in India.

Falling export revenues have led to worries over corporate indebtedness, which stands at 100% of GDP. This alone would not usually be cause for concern (in Hong Kong the ratio is 211%), but if companies do not have the means to repay the debt amid declining income, it may become an issue.

The government has embarked on a large-scale corporate restructuring programme, which the IMF estimates will cost US$27bn. The immediate focal points are shipping and shipbuilding, two bloated but vital industries for the Korean economy.

Aggressive reforms are underway in sectors beset by the downturn in global trade. Hanjin Shipping, the country’s largest container line, went to the wall in September, while question marks remain over surviving rivals [read our latest cover story on Hanjin Shipping here].

In July, the government launched a near-US$10bn fund to restructure the industries, purchasing hybrid bonds issued by state-owned banks as a means of buying up debt owed by companies in the industry.

“This process is being supported by the authorities, and restructuring will lead to a certain degree of job losses and hence form a drag to economic growth. Note that household debt levels are also very high in South Korea, posing another drag to economic growth,” Arjen Van Dijkhuizen, senior economist at ABN Amro, tells GTR.

Political cronyism

All of this is going on to a backdrop of a bizarre and wide-reaching corruption scandal. This Friday, the Korean parliament will vote on whether to impeach Park, the country’s first female leader and daughter of Park Chung-hee, who led the country in a military dictatorship in the 1970s.

Park stands accused of abusing her position as president by colluding with Chol Soon-sil, the daughter of a cult leader. Chol befriended Park after her father’s assassination in 1979. Chol is said to have influenced every level of presidential decision making since Park took office in 2013.

The pair are together alleged to have coerced large Korean companies, including Samsung, to pay Chol millions of dollars. Chol has never held public office and is facing embezzlement charges. The scandal has gripped the nation and brought millions of people to city streets in protest.

With an approval rating of 4%, Park’s position is untenable. She has vowed to respect Friday’s vote, but will not immediately step down, instead offering to leave her post in April 2017, meaning the saga will roll for months.

The uncertainty is likely to do no favours for an embattled economy. Questions are being asked as to how this will affect the ongoing restructuring programme.

“It won’t be rapid – because of the political stress, implementing anything will take at least six months. You need to have a solid government who will support it correctly. It’s difficult to implement policy in South Korea now. Even if you’ve mapped the risk and injected capital into the banks to support some sectors, the restructuring plan – such as merging some companies, looking at insolvencies – that takes time,” says Mahmoud Islam, Asia economist at Euler Hermes.

The fear is that the political stalemate will lead to policy paralysis, which doesn’t bode well for Korea when there are so many other economic issues.

“The uncertainty appears to be having an impact on the economy,” says Krystal Tan, Asia analyst at Capital Economics.

“Consumer sentiment has slumped and is now at its lowest level since the 2008-09 global financial crisis. Business sentiment has weakened too. With the economy facing several other headwinds in the form of Samsung’s decision to end production of the Note 7 smartphone, a tough new anti-corruption law passed in 2015 but only coming into effect now, which is likely to hit spending at restaurants, as well as aggressive restructuring of the shipbuilding sector, growth is likely to slow sharply in the final quarter of the year.”

It is not all doom and gloom: Korean industry has proven itself to be hardy in the past. Hanjin Shipping, which went belly up after pigging out on borrowings and splurging its own cash reserves, is thought to be exceptional, with Korean companies generally holding reasonable reserves.

Furthermore, all but 5% of corporate debt is held in local currency – a further mitigating factor that should shield companies from Fed hikes or spikes in the US dollar under a volatile Trump administration.

And while in the not-too-distant future China may start competing with Korean manufacturing as it continues to climb up the value chain, next year the news from across the Yellow Sea could be more positive.

“We expect export-oriented South Korea to profit from the expected pick-up in global growth and the economic stabilisation in China. We have raised our 2017 growth forecast for China from 6 to 6.5%,” says Van Dijkhuizen.

But the structural issues remain. In the UK, Korea is sometimes cited as an example of a modern-day export-led economy to emulate – and there is much to admire about its ingenuity and meteoric rise. However, it remains acutely vulnerable to geopolitical and global trade headwinds.