Mountains after Mountains: Korea is Containing COVID-19 and Looking Ahead
IMF News, April 29, 2021
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- Authors: Sohrab Rafiq, Andrew Swiston IMF Asia, Pacific Department April
- Published: April 29, 2021
Context and authorship
- By Sohrab Rafiq and Andrew Swiston, IMF Asia and Pacific Department
- April 29, 2021
Public health response and macroeconomic outcome
- Korea’s containment strategy featured widespread testing, data-intensive contact tracing, and treatment tailored to the severity of each case.
- The infection rate was kept below that of its peers.
- Korea deployed a comprehensive economic response including fiscal support, measures to stabilize financial markets, and steps to ensure ample availability of credit.
- Real GDP growth in 2020: -1.0 percent.
- The downturn was the smallest among advanced G-20 economies.
Recovery pattern and near-term policy stance
- The economy is recovering quickly, but the pace is uneven across sectors (described as a “K-shaped” recovery).
- Exports have rebounded, driven by pandemic-induced increases in online activities, supporting business investment.
- Services and consumption remain below pre-pandemic levels.
- Authorities have maintained supportive fiscal and monetary policies.
- Recent additional targeted support approved through a supplementary budget: 0.8 percent of GDP.
- Given Korea entered the COVID-19 shock with low public debt, this stimulus can be withdrawn gradually over the next few years.
Financial sector and credit dynamics
- Korea’s financial system has weathered the COVID-19 shock relatively well, supported by years of sound macro-financial policy management.
- Among systemically important banks, loan repayment rates are very high, and there are ample capital and provisioning buffers.
- Korean household debt: over 190 percent of disposable income.
- Around half of the total stock of SME bank credit (around 22 percent of GDP) has been extended to firms with earnings that are insufficient to cover interest payments.
- Lending has grown quickly across all sectors since the pandemic outbreak, pushing credit as a percent of GDP further above its trend value.
- Policy challenge in 2021: sustain credit support until recovery broadens, then proceed with a calibrated withdrawal so support does not impede needed post-COVID-19 reallocation of resources.
Structural reform priorities for medium-term inclusive growth
- Korea’s improvement in living standards has slowed and productivity remains below advanced-economy peers.
- The Korean New Deal (a five-year development strategy) aims to:
- promote digitalization,
- accelerate the transition to a low-carbon economy,
- strengthen the social safety net.
- Expected benefits: boost productivity in service sectors and reduce inequalities faced by women, youth, and the elderly.
- Remaining reform agenda items:
- reduce barriers to entry for new firms,
- stimulate innovation,
- tackle remaining labor market rigidities.
- Policy note: strengthening carbon pricing to provide robust incentives for green investment will be important to achieve the objectives of the green pillar of the Korean New Deal.
Source: IMF News — "Mountains after Mountains: Korea is Containing COVID-19 and Looking Ahead", April 29, 2021.