Press Release No. 23/304

IMF Staff Completes 2023 Article IV Mission to Republic of Korea

September 6, 2023

• With a gradual strengthening in 2023H2, growth is projected at 1.4 percent in 2023. Trend inflation is projected to continue to moderate toward the authorities’ target.
• Near-term fiscal and monetary policies should stay the course and remain restrictive, limiting the increase in public debt and continuing to address inflation.
• Proactive measures have helped address stress in financial markets. Continued efforts are needed to contain financial vulnerabilities related to the real estate market and high household debt.
• Structural reforms are needed to raise medium-term growth and address fiscal challenges from population aging.

Seoul: An International Monetary Fund (IMF) team, led by Mr. Harald Finger, Mission Chief for the Republic of Korea, visited the country from August 24 to September 6, 2023, to hold discussions for the 2023 Article IV Consultation. At the conclusion of the discussions, Mr. Finger issued the following statement:

“Like many other advanced economies, Korea has faced inflation challenges and a sharp growth slowdown. Headline inflation has declined significantly after peaking in mid-2022, though core inflation has remained stickier. Pockets of financial sector vulnerability emerged amid the housing market downturn and rising interest rates, and financial risks have increased but appear to remain manageable.

“Growth is likely to improve in the second half of the year as the semiconductor sector gradually recovers, reaching 1.4 percent for the year and strengthening further over the medium term. Despite a temporary rebound in August, inflation is projected to continue moderating and approach the authorities’ 2 percent target by end-2024. In the current, uncertain global economic environment, the economic outlook is subject to a high degree of uncertainty.

“The current, restrictive stance of monetary and fiscal policy in Korea should be maintained in the near term. The monetary policy rate should stay above neutral for the time being to address inflation, with the interest rate path remaining data dependent. With significant fiscal expansion during the pandemic and the debt-to-GDP ratio still on an upward trajectory, fiscal policy should continue to normalize, also supporting monetary policy in containing inflation.

“Financial market stabilization measures should be kept temporary and targeted. The easing of housing-related regulations and tax cuts should strike a balance between preventing excessive price falls and allowing for an orderly adjustment. Stronger buffers, combined with enhanced regulation, supervision, and risk management, are vital for strengthening the resilience of non-bank financial institutions. Plans to further buttress the banking sector’s liquidity and loss adsorption capacity are welcome. Continued efforts are needed to gradually bring down the high level of private debt. Korea’s international reserves provide adequate foreign exchange liquidity buffers under a wide range of plausible shocks.

“Renewed structural reform momentum will be crucial for reinvigorating medium-term growth and addressing challenges from population aging. Important priorities include establishing a rules-based fiscal framework, reforming the pension system, increasing labor market flexibility, closing gender gaps, spurring more widespread innovation, and strengthening climate policies.

“We would like to express our gratitude to the authorities and other stakeholders for productive discussions, excellent support, and generous hospitality during our visit."