IMF Executive Board Concludes 2017 Article IV Consultation with the Republic of Korea
IMF News, February 13, 2018
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- Published: February 13, 2018
Near-term outlook and recent developments
- Growth picked up in 2017 after slowing in the second half of 2016, led by a strong expansion in investment, especially in the IT and construction sectors.
- Export growth strengthened due to improving external conditions and high global demand for semiconductors.
- Private consumption growth picked up but remains below economic growth.
- Monetary policy has been accommodative, with lending rates and long-term yields close to record lows.
- Fiscal stance has been tight, with the structural budget surplus expected at 1.4 percent of GDP (consolidating central government and social security fund accounts).
- Unemployment rate is hovering around 3.8 percent (seasonally adjusted) but remains significantly higher for youth.
- Inflation has rebounded to around the Bank of Korea’s 2-percent target, although it displayed some volatility.
- The current account surplus narrowed in 2017 but is expected to remain large above 5 percent in the medium term.
- Household debt is identified as the main financial stability risk; macroprudential policies are effectively addressing challenges so far.
Growth projections and external balances
- GDP growth:
- Projected at 3.2 percent in 2017.
- Forecast at around 3.0 percent in 2018.
- Drivers in 2018: private consumption growth supported by the large minimum wage increase and policies supporting employment and social spending; exports benefiting from strong global trade.
- Current account surplus:
- Projected at 5.6 percent of GDP in 2017.
- Projected to edge lower to around 5.4 percent of GDP in 2018.
Executive Board assessment and macro policy guidance
- Directors welcomed the ongoing recovery and judged near-term risks to growth as balanced.
- Long-term challenges cited: aging population, slowing productivity growth, and rising income inequality partly reflecting weak social protection, and labor and product market duality.
- Fiscal policy:
- Commended for prudence and buffer-building.
- Directors agreed fiscal policy should be expansionary to enhance the social safety net, support short- and long-term growth, and reduce imbalances.
- Many Directors highlighted ample fiscal space to warrant a more expansionary stance; a number of Directors shared the authorities’ cautious approach to increasing public expenditures.
- For the longer term, fiscal challenges from the aging population will necessitate additional revenue mobilization.
- Monetary policy:
- Should remain accommodative as inflationary pressures are likely to remain subdued.
- Directors recommended enhancing monetary policy credibility by strengthening communication of policy intentions and clarifying the BOK’s policy reaction function.
- Exchange rate should continue to move flexibly; intervention should be limited to addressing disorderly market conditions. A few Directors encouraged publication of intervention data.
- Financial sector:
- Financial system is sound and macroprudential policies are effectively addressing high household debt risks.
- Authorities encouraged to remain vigilant to emerging risks, especially from non-bank financial institutions.
Structural reforms and labor market policy recommendations
- Priority reforms to mitigate duality in the labor market and support job creation to increase productivity and foster inclusive growth:
- Increase flexibility for regular workers.
- Establish a strong and inclusive safety net for the unemployed.
- Strengthen active labor market policies.
- Public sector job expansion: scope exists but should be approached cautiously.
- Minimum wage: should be increased with care going forward; any compensatory subsidy to small- and medium-size enterprises should be temporary.
- Youth employment: strengthen existing measures such as vocational schools, the work-study dual system, and internships.
- Female labor force participation and leadership: policies should focus on strengthening participation and leadership.
- Business environment:
- Ease regulatory burden for firms, especially in the service sector.
- Government policy towards SMEs should prioritize fostering growth and innovation rather than shielding weaker firms.
- Scope to better design and coordinate R&D support.
Selected economic indicators, 2014–18 (highlights)
- Real GDP (percent change): 2014: 3.3; 2015: 2.8; 2016: 3.2; 2017: 3.0; 2018: (projection)
- Total domestic demand: 2014: 3.1; 2015: 4.0; 2016: 3.7; 2017: 5.0
- Final domestic demand: 2014: 2.5; 2015: 3.6; 2016: 4.8; 2017: 2.9
- Gross fixed investment: 2014: 3.4; 2015: 5.1; 2016: 5.2; 2017: 9.0
- Nominal GDP (in trillions of won): 2014: 1,486; 2015: 1,564; 2016: 1,637; 2017: 1,732; 2018: 1,805
- Gross national saving (in percent of GDP): 2014: 34.5; 2015: 35.6; 2016: 35.7; 2017: 36.6; 2018: 36.0
- Gross domestic investment (in percent of GDP): 2014: 29.3; 2015: 28.9; 2016: 29.2; 2017: 31.0; 2018: 30.7
- Current account balance (in percent of GDP): 2014: 6.0; 2015: 7.7; 2016: 7.0; 2017: 5.6; 2018: 5.4
- CPI inflation (end of period): 2014: 0.8; 2015: 1.1; 2016: 1.3; 2017: 2.1; 2018: 1.9
- CPI inflation (average): 2014: 0.7; 2015: 1.0; 2016: (…)
- Consolidated central government revenue (in percent of GDP): 2014: 21.2; 2015: 21.5; 2016: 22.5; 2017: 22.4; 2018: 22.7
- Consolidated central government expenditure (in percent of GDP): 2014: 20.8; 2015: 20.9; 2016: 20.7
- Structural balance (consolidating central government and social security funds): 1.5 (year not specified in table)
- General government debt (in percent of GDP): 2014: 35.9; 2015: 37.8; 2016: 38.3; 2017: 37.6; 2018: 37.3
- Credit growth (end of period): 2014: 7.4; 2015: 7.6; 2016: 7.3; 2017: 6.2; 2018: 6.1
- Exports, f.o.b. (in billions of U.S. dollars): 2014: 613.0; 2015: 542.9; 2016: 511.9; 2017: 569.1; 2018: 603.3
- Imports, f.o.b. (in billions of U.S. dollars): 2014: 524.1; 2015: 420.6; 2016: 393.1; 2017: 446.6; 2018: 476.9
- Gross international reserves (end of period, in billions of U.S. dollars): 2014: 358.8; 2015: 363.2; 2016: 366.3; 2017: 366.9; 2018: 368.5
- Total external debt (end of period, in billions of U.S. dollars): 2014: 424.3; 2015: 396.1; 2016: 380.9; 2017: 364.9; 2018: 354.0
- Total external debt (in percent of GDP): 2014: 30.1; 2015: 28.6; 2016: 27.0; 2017: 23.8; 2018: 21.4
- Debt service ratio: 2014: 9.3; 2015: 8.4; 2016: 7.8
Source: IMF Communications Department, February 13, 2018.