Press Release No. <a name="P16_75"></a>05/133

The following statement was issued today in Seoul by an International Monetary Fund (IMF) staff mission:

"An IMF mission led by Joshua Felman, Assistant Director in the Asia Pacific Department, visited Seoul during May 30–June 7 for its regular biannual staff visit. The mission met with a wide range of people, from the private sector as well as the government, to discuss the economic outlook and the policies needed to promote the recovery.

"After these discussions, the mission is convinced that an economic recovery is on its way. For the past two years, the Korean economy has been undergoing a period of adjustment, as households have been cutting back on their spending in order to reduce the excessive levels of debt they accumulated during the economic boom of 2000-2002. Now, most households are finally in a position where they can begin to spend again, and they have begun to do so. In the fourth quarter of last year, private consumption increased modestly, the first such increase in nearly two years. And in the first quarter of 2005, private consumption accelerated further, to a rate that was better than we had expected. As this trend continues, the other sectors of the economy should also begin to revive.

"This recovery is being supported by the government's macroeconomic policies. Fiscal policy has aimed at stimulating the economy by frontloading budget expenditures into the first half of the year and increasing infrastructure spending through the Comprehensive Investment Initiative. Given the strong frontloading that has occurred, however, there is a risk that government spending could drop in the second half of the year, undermining the still-fragile recovery. Accordingly, we would recommend enacting a modest supplementary budget, targeted on the social safety net. Meanwhile, with inflation firmly under control, the Bank of Korea has room to maintain its low interest policy for some time; indeed, it even has scope to cut rates further, should the recovery falter.

"At the same time, ensuring that the recovery is vigorous and sustainable will require addressing the economy's underlying structural problems. As we noted in our annual report on Korea, policies will need to aim at:

• Accelerating the restructuring of delinquent household debt. The government has put in place a solid framework for debt delinquents to reschedule their debts. But there are many households that are simply not in a position to pay what they owe. To help them, personal bankruptcy procedures need to be streamlined and the resources of the courts expanded.

• Revitalizing the small and medium-sized enterprise (SME) sector. We strongly endorse the government's plans to gradually scale back the public credit guarantee system, as this will "level the playing field" among SMEs. In addition, further deregulation of the service sector would help create new investment opportunities for these companies.

• Enhancing labor flexibility. Reducing the employment protection for regular workers and strengthening the social safety net for the most vulnerable is crucial for encouraging companies to hire more regular workers and to invest more in Korea."