Press Release No. 09/448

Press Release No.09/448
December 8, 2009

The following statement was issued today in Seoul after the conclusion of an International Monetary Fund (IMF) staff visit to Korea:

“An IMF mission led by Mr. Subir Lall visited Seoul during December 2-8, 2009 to discuss with the authorities and other key counterparts recent economic developments and the outlook for Korea. The mission team would like to thank them for the productive and open engagement.

“The Korean economy has bounced back impressively from the unprecedented capital outflows and dramatic collapse in export demand late last year. The authorities’ comprehensive fiscal, monetary, and financial policy response helped pave the way for a recovery that is now being increasingly led by private sector demand. Looking ahead, momentum over the near term is likely to be broadly sustained by facilities investment and inventory re-building, although some deceleration in sequential growth is to be expected. As a result, economic activity is expected to expand by ¼ percent for 2009 as a whole, and growth is projected at 4.5 percent for 2010. The still significant output gap and slack in the labor market suggest inflationary pressures will remain subdued over the near term.

“The outlook for 2010 remains subject to considerable uncertainty, although overall risks are now broadly balanced. The downside risks stem primarily from sluggish growth in Korea’s advanced economy trading partners. These are balanced by the upside risks to growth from a stronger than projected recovery in emerging economy trading partners, inventory rebuilding and a boost to consumption from firming labor market conditions.

“In the context of the high degree of uncertainty surrounding the outlook, macroeconomic policy faces the challenge of striking the right balance between guarding against any unexpected weakening in momentum and beginning the process of gradually normalizing policy settings as a self-sustained recovery gains hold. Based on the current budget proposal, fiscal policy is expected to subtract from growth in 2010, in comparison with 2009. In this context, should signs of renewed weakness in activity emerge next year, planned budgetary spending could be brought forward and if necessary augmented with well-targeted fiscal stimulus measures to safeguard the recovery. The accommodative monetary policy stance has been appropriate in supporting the recovery, and if the recent momentum in private demand is firmly established over the coming months, the authorities should consider a cautious withdrawal of monetary stimulus. Korea’s flexible exchange rate regime has served the economy well and intervention should be limited to smoothing excessive volatility.

“The financial system has weathered the impact of the global financial turmoil well. Banks remain adequately capitalized, and conditions in financial markets have largely normalized. In this context, a measured withdrawal of quasi-fiscal support for the Small and Medium Enterprise (SME) sector would help align private sector incentives. The recent upturn in capital inflows has been mainly in the form of portfolio debt and equity, posing fewer risks of a build up of excessive leverage in the financial system. Nevertheless, proposed measures to strengthen the resilience of the banking system to unexpected bouts of volatility are welcome.”