After the sky-high military tensions of 2017, when 2018 rolled around the first half of the year looked to be a breakthrough in the long-running North Korea risks, and possibly even a breakout year for North Korea itself – the most sanctioned nation on earth.

Following a conciliatory new year’s message from state leader Kim Jong Un, North Korea attended the 2018 Pyeongchang Winter Olympics in the South and held three summits with South Korean President Moon Jae-in. Given that no other South Korean president has summited more than once with a North Korean leader, that was remarkable enough.

Kim also had three summits with Chinese President Xi Jinping, but the real big ticket item was his June summit with US President Donald Trump in Singapore – a historical first for North Korea-US relations.

Moon and Kim appear to share a real bonhomie, and Moon has acted as an intermediary with Trump. Trump also appears to have hit it off with Kim, repeatedly praising his ongoing missile and nuclear test moratorium.

However, the promise of the first half of 2018 remained unfulfilled in the second half. With Washington ignoring Pyongyang’s requests to reduce military tensions and improve bilateral relations, North Korea’s denuclearization process has barely got off the ground.

Ministerial-level dialog channels between Pyongyang and Washington produced no results and Washington refused to ease sanctions, obviating economic engagement between the Koreas.

This has reduced the Koreas to largely symbolic actions: exchanging cultural and sport delegations, blowing up a handful of infantry posts in the DMZ, reconnecting rail lines. But there is no exchange of goods or services.

Moon’s office said on Sunday that in a rare letter sent to Seoul, Kim has vowed to meet with him “frequently” next year to discuss denuclearisation.

The North’s leader “expressed a strong determination to visit Seoul while watching future situation,” Moon’s spokesman Kim Eui-kyeom told reporters.

Kim also “expressed an intention to meet with Moon frequently in 2019” to pursue peace and “solve the issue of denuclearising the peninsula together,” the spokesman said.

However, Moon’s role is in question, with some pundits accusing him of wishful thinking and spin-doctoring messages of North Korean goodwill to Trump. With Kim not honoring a promise to Moon to visit Seoul in December, it seems there is little remaining for the two leaders to discuss: All progress now hinges on Pyongyang-Washington relations.

After the euphoria of 2018, there is heavy lifting ahead in 2019. Very, very few experts expect Kim to denuclearize. The big question is whether Trump will continue to be satisfied with Kim’s missile-nuclear test moratorium, or will attempt to apply further economic – and possibly military – pressure on Pyongyang.

Much now depends on the second Kim-Trump summit, expected – but not confirmed – in early 2019. Given the vagueness of their June 2018 post-summit declaration, more detailed and concrete proposals are clearly demanded at their 2019 meeting, but absent pre-summit working-level meetings, it is difficult to see how this can be achieved.

This leaves South Korea, locked into a US alliance and the global trading and financial system, limited wriggle room to influence the fate of the peninsula in 2019.

The domestic front

The honeymoon is over for Moon. His ratings have fallen from highs of 80% in early 2018 to 48% at year’s end. He was buoyed by the exciting inter-Korean vibes of 2018, but those will be far harder to sustain in 2019.

Domestically, he faces major pressure on employment. In 2018, the unemployment rate hit 4% for the first time since 2009; it included a 19-year high in youth unemployment.

Employment growth is expected to improve only slightly due to demographic changes and industrial restructuring, indicating that 2019’s rates will remain similar to 2018’s, according to the Korea Development Institute, or KDI.

Meanwhile, small businesses lambast Moon’s minimum wage increases. Seoul will implement a 10.9% hike on January 1, following a 16.4% rise in 2018. Yet South Korean productivity has been stagnant for three years. In short, this “income-led growth” policy looks economically unsustainable.

However, Moon is fortunate in two factors. Firstly, 2019 is a clear political year: The next National Assembly Election is in 2020, the presidential election in 2022. Secondly, the conservative opposition remains divided, unsure and ineffectual in the long fallout following the impeachment of ex-conservative President Park Geun-hye in 2017 – now serving a 33-year prison term for power abuse and corruption.

Still, the electorate has limited patience; all recent presidents have suffered late-term “lame duck” periods, in which their popularity dwindles, scandals strike and the bureaucracy turns sluggish in implementing policy. For Moon, lame duck-hood may come earlier rather than later.

Diplomacy

On foreign policy, Moon has delivered on inter-Korean relations, but is vulnerable. For those to continue, he depends on the goodwill of Kim and Trump.

Moon has improved relations with China, which were hammered by the deployment of a US anti-missile system. Korean firms now appear to be operating normally in China, their leading market, and the floodgates have been reopened on Chinese tourism to South Korea.

However, Moon has lashed out at Tokyo, de facto killing a landmark deal sealed between the previous administration and Tokyo in 2015 over “comfort women.” Also, the Korean judiciary has ordered Japan to compensate Koreans for wartime forced labor, infuriating Tokyo, which insists that the issue was covered in a 1965 treaty which opened diplomatic relations and included an economic compensation package.

With Korean lawyers threatening to seize Japanese firms’ assets, this diplomatic furor could spill over into the economic space.

Alarmingly, at year’s end, the two Northeast Asia democracies are engaged in a war of words over an incident in which a South Korean destroyer apparently locked its target radar onto a Japanese reconnaissance aircraft that was overflying the ship, which was engaged in a search and rescue mission for a North Korean fishing boat.

Macroeconomy

The IMF forecasts global growth of 3.7% in 2019, the same estimate it held for 2018. South Korean growth, however, is losing steam.

Growth in 2018 is expected to come in at about 2.7% to 2.8%, according to consensus estimates. Those numbers are downgrades from the 3.0% and 2.9% forecasts at the start of 2018. The Bank of Korea, or BOK, anticipates 2.7% for 2018;the IMF expects 2.8%.

The BOK adjusted its growth estimate for 2019 down, from 2.8% to 2.7%. Korea Development Institute forecasts 2.6% growth for 2019, as export growth moderates, facility spend decreases and domestic demand stalls.

Numbers are anticipated to slow, particularly in the first half of 2019, something the government appears to be aware of: it will be front-loading 70% of the year’s budget – 469 trillion won, or US$416.6 billion – in the early part of the year in a stimulus move.

Facilities investment in 2018 underwent a downward adjustment due to the base effect from sharp increases in semiconductor-related investments, a core export, in 2017. Construction also entered a downturn in 2018.

Export growth has fallen below global trade volume, raising concerns over the competitiveness of the manufacturing sector. In 2018, surging semiconductor sales saved Korea’s export sector, but a cyclical downturn is anticipated next year, with revenue falls of more than 4%.

In 2019, the Bank of Korea needs to walk both domestic and global tightropes. To prevent capital flight, it needs to stay coupled to the Fed, which has been lifting rates, and there is also pressure to cool the Seoul real estate markets – always a political hot potato.

However, at the same time, the bank must be mindful of South Korea’s massive household debt, which is impacted by interest rate rises. In October, Korea’s household debt was growing at the third-fastest rate among 43 major economies, behind only China and Hong Kong; in March, household debt was equal to 95% of South Korea’s GDP.

Given the centrality of trade and exports to the South Korean economy, external risk factors in 2019 will be major countries’ monetary policies, macro-economic situations, the China-US trade war and uncertainties in the Eurozone, notably Brexit and Italy’s finance sector.

Markets

The year 2018 has been a bloody one for the stock market. The benchmark KOSPI stock index, which includes such blue chips as Samsung Electronics and Hyundai Motor, hit a record high of 2598 points in January 2018, but by year’s end had shed significant value, ending at 2041 points.

For 2019, a market expert said the majority of global investment banks remain overweight on Korean markets and are bullish on fundamentals, even amid falling growth forecasts. The perennial low valuations of Korean stocks – “The Korea Discount,” based largely on corporate governance risk, though also factoring in North Korea risk – remain a draw for value hunters.

However, the expert noted, the range of investment bank forecasts for the KOSPI in 2018 proved wrong; most were in the 2,200 to 2,400 point range. This suggests lower anticipations next year. The Korea Capital Markets Institute holds a gloomy forecast for the market next year, but expects it to bottom out by the end of the first half of 2019, indicating a rebound in the second half.

In 2018, the won was steadier. It stood at 1065.22 to the dollar on January 1, but had weakened to 1,116.26 against the greenback on December 28.

Looking ahead, Korea’s financial mandarins have customarily had interventionist tendencies to weaken the won – policies which assist chaebol exporters, but erode the spending power of the average Korean. That, however, runs contrary to Blue House policy.

Moreover, an interventionist policy appears particularly risky given the Trump administration’s known animosities toward Asian exporters which benefit from cheap currencies. The KDI expects the won to further depreciate, by a modest 1%, in 2019.