Statement by IMF Staff at the Conclusion of the 2007 Article IV Consultation Discussions with Korea

Press Release No. 07/136
June 18, 2007

The following statement was issued in Seoul on June 13 by an International Monetary Fund (IMF) staff mission:

"An IMF mission led by Jerry Schiff, Assistant Director in the Asia-Pacific Department, visited Seoul during May 31-June 13 to hold Article IV consultation discussions. The mission met with a wide range of people, from the private sector as well as the government, to discuss the immediate economic outlook and the policies needed to promote long-term growth. The team would like to express their appreciation to the authorities for their open and constructive engagement and we look forward to continued fruitful cooperation in the future.

"The Korean economy is in good shape. With domestic demand holding up and exports continuing to perform well across a range of industries, growth should pick up modestly in the remainder of 2007, reaching 4.4 percent for the year. Inflation is expected to edge up, reflecting higher oil prices, but should remain well within the Bank of Korea's target range. And the external current account is expected to remain in broad balance for the year.

"Near-term risks to this benign scenario should be manageable. The recovery of domestic demand is not yet well-established and could prove susceptible to shocks, such as further hikes in oil prices, or another bout of global financial turbulence. A sharper or more prolonged slowdown in the United States than anticipated could also dampen exports, although this risk may be receding. Moreover, should downside risks emerge, Korea retains some scope for a macroeconomic response, in particular on the monetary side. The financial sector is in good health, but pockets of concern remain. A decline in housing prices could complicate the ability of households with short-term bullet type mortgages to roll over their debt and thereby constrain consumption. Recent rapid growth in lending to SMEs also bears close watch, although thus far there are few indications of problems.

"Over the longer run, Korea faces stiffer challenges. First, a rapidly aging population will generate large fiscal pressures. To address this, the full range of fiscal tools, including tax policy and tax administration, expenditure reform, and debt management will likely be required. While the full impact of aging will be felt over several decades, failure to act soon will raise substantially the ultimate cost of adjustment, with larger implications for growth.

"In addition, while Korea has thrived in the globalized economy, it now finds its manufacturing base, in particular at the lower-skilled end, threatened. Policies should be aimed at ensuring that manufacturing can continue to move up the value chain, and raising services productivity. In this context, Korea needs to continue to create a more conducive investment climate, including for FDI, including by opening and deregulating the services sector and enhancing labor market flexibility. Further trade liberalization could help in that regard. Continued financial sector development will also need to play key role in the economic transformation to a high value added and service-oriented economy.

"The IMF Executive Board meeting on the Korea Article IV consultation is expected to take place on August 20."



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