Transcript of a Press Briefing on 2010 Article IV Consultation with Korea
IMF News, September 2, 2010
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- Published: September 2, 2010
Growth outlook
- Revised GDP growth projections: 6.1 percent this year and 4.5 percent next year.
- Growth drivers this year: investment and rebuilding of inventories; shift from public-sector demand to private-sector demand.
- Output gap: expected to close sometime over the next few months; baseline assumes easing of growth in the second half of this year.
- Upward revision for this year partly reflects stronger-than-anticipated first-half performance and front-loading of the recovery (first-half growth stronger than earlier forecast of 5.7 percent).
- 4.5 percent projected for next year is described as slightly above the economy’s potential and still robust.
Risks to the outlook
- External risks dominate:
- Larger-than-anticipated slowdown in advanced economies could reduce Korean exports.
- Tail events (e.g., repeat of late-2008 liquidity and financial troubles) are possible but not in the baseline.
- Domestic sources of growth are considered strong.
- Capital inflows and exchange rate appreciation present potential pressures but are viewed in context of exchange-rate flexibility and export fundamentals.
Monetary policy assessment and recommendations
- Recent policy moves:
- Bank of Korea raised policy interest rate from 2.0 percent to 2.25 percent (25 basis points) in July, then stayed on hold in August.
- Current stance:
- Policy described as "highly accommodative."
- Short-term real interest rates are negative.
- Neutral rate estimate and room for tightening:
- Neutral interest rate suggested to be "significantly higher" than current policy rate; estimate cited: around 4 percent.
- Current policy rate of 2.25 percent is well below neutral; there is room to cautiously raise rates while remaining supportive of growth.
- Any reversal of accommodation should be cautious due to global uncertainties.
- Rationale for rebuilding policy space:
- Rebuilding monetary "ammunition" advisable to respond to future shocks.
- Low public debt gives Korea ample fiscal ammunition as well.
Fiscal policy stance
- Fiscal policy is described as moving into a consolidation phase this year.
- Consolidation is judged appropriate given strong underlying growth and shift from public to private demand.
- Low public debt cited as providing capacity to head off future risks.
Structural concerns and medium-term policy
- Recommendation to develop a "second additional engine of growth" to reduce vulnerabilities from heavy export dependence.
- Encourage making the non-tradable sector more vibrant via structural reforms across multiple fronts.
Housing market and household debt
- Authorities announced comprehensive measures (announced last week) addressing housing market concerns:
- Measures cover debt-to-income ratios, support to lower-income households, and actions related to the housing corporation.
- Observed problems:
- Very low transaction volumes in recent months raising concerns about a protracted slump.
- High household indebtedness may limit the effectiveness of measures, as households may be unwilling or unable to take on more mortgage debt.
Exchange rate, capital flows, and export resilience
- Recent large capital inflows to Korea (as in other Asian countries) reflect low yields in advanced economies and Korea’s strong relative growth.
- Exchange rate policy:
- Korean authorities maintain a flexible exchange rate; flexibility serves as an automatic stabilizer.
- IMF assessment: exchange rate model favored shows the won "slightly undervalued" at the moment, but "not substantially below" model-implied levels.
- Impact of appreciation risk:
- Appreciation from inflows could exert upward pressure on the exchange rate; however, export strength is attributed primarily to fundamentals not exchange-rate weakness:
- Strong balance sheets of large corporates allowed market-share gains during the crisis.
- Sectoral performance: shipbuilding recovering as new orders pick up; electronics and automobiles benefit from global market diversification, including large shares to emerging markets.
- Example cited: Hyundai succeeded in the downturn by offering the right price point and market fit.
- IMF view: exchange-rate flexibility should be preserved; measures introduced in June were seen as prudential (insulating banking system from rapid outflows) rather than capital controls.
IMF instruments (PCL and FCL)
- Question on whether Korea will apply for the PCL/FCL: IMF representative declined to speculate and referred the question to Korean authorities.
Transcript of a Press Briefing on 2010 Article IV Consultation with Korea — September 2, 2010