Public Information Notice: IMF Concludes Post-Program Monitoring Discussion on Korea

IMF News, August 2, 2001

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Public Information Notice: IMF Concludes Post-Program Monitoring Discussion on Korea

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Bibliographic details

• Published: August 2, 2001

Background and context

• On August 1, 2001, the Executive Board of the International Monetary Fund (IMF) concluded a Post-Program Monitoring discussion on Korea.
• Korea's three-year stand-by arrangement with the IMF expired on December 3, 2000.
• Korea continues to make early repurchases according to a schedule that will eliminate all Fund credit outstanding by end-August 2001.
• Post-Program Monitoring provides for more frequent consultations between the Fund and members whose arrangement has expired but that continue to have Fund credit outstanding, with a particular focus on policies that have a bearing on external viability.

Macroeconomic outlook and risks

• Recent performance and IMF staff projection for 2001:
  • After two years of growth averaging about 10 percent, the economy is experiencing a harder landing than expected in 2001.
  • IMF staff project GDP growth of 3½ percent in 2001, but there are significant downside risks.
• Sources of downside risk:
  • The downturn in the global electronics cycle.
  • Last year's sharp fall in Korea stock prices and rise in oil prices.
  • Weak sentiment over the slow pace of corporate restructuring.
• Inflation and monetary policy:
  • Inflation has picked up, but is largely driven by temporary supply-side factors; slow growth has kept down demand and wage pressures.
  • The Bank of Korea has cut its target for the overnight call rate twice by a total of 50 basis points in the current cycle, and the call rate is now 4¾ percent.
• Fiscal stance and recent actions:
  • Following the strong outturn in 2000 (a surplus of 1 percent of GDP), the 2001 budget was designed to be mildly expansionary with a consolidated central government deficit target of 0.2 percent of GDP.
  • This target has now been raised to 1 percent of GDP with the supplementary budget recently presented to the National Assembly.
  • The actual fiscal balance in Q1 was a surplus of 2.2 percent of GDP, although this in part reflects the typical seasonal pattern.
  • A high-level inter-ministerial monitoring committee has been set up to ensure that the budget's expenditure allocations will be fully implemented.
• External sector and exchange rate:
  • The current account surplus is projected at about 2¾ percent of GDP in 2001, with slowing import demand more than offsetting the weakness in exports.
  • Since mid-April, the won has strengthened after a bout of weakness earlier in the year.
  • With ample liquidity, market apprehensions have subsided and corporate fund-raising conditions have continued to improve.

Corporate and financial sector reform

• Corporate restructuring:
  • Focus has been on a few high profile cases, which include the two weakest Hyundai affiliates.
  • Legislation on prepackaged bankruptcy and mergers and acquisitions has been passed.
  • Restructuring continues to be hampered by disagreements among creditors over burden sharing and weak insolvency procedures.
• Financial consolidation:
  • Formation of the Woori Holding Company groups four weak commercial banks and a merchant bank, all of which have been recapitalized with public funds.
  • Provisioning for loans has improved, and impaired loans have declined from a system-wide 15 percent at end-1999 to 9½ percent at end-March 2001, owing to securitization, write-offs, and loan recovery.

Executive Board assessment and policy recommendations

• Overall assessment:
  • Directors commended the authorities for the reorientation and strengthening of the structure of the economy since the 1997 crisis, and noted that external vulnerability has been sharply reduced.
  • The weak global economy has taken a toll on Korea, while domestic demand remains sluggish.
  • Directors welcomed recent steps to ease macroeconomic policies but stressed the need for firm action to address continued weaknesses in the corporate and financial sectors.
• Fiscal policy recommendations:
  • It will be important to achieve the desired degree of fiscal stimulus in 2001; Directors urged the authorities to work toward meeting the revised target for the consolidated central government deficit.
  • Directors noted the need for a fundamental reorientation of budget practices to address shortcomings in fiscal policy implementation and welcomed consideration of implementing the recommendations of the Fund's recent technical assistance report.
• Monetary and exchange rate policy guidance:
  • Directors observed that monetary policy has succeeded both in building credibility in the inflation targeting framework and in responding to the downturn.
  • Directors endorsed the Bank of Korea's recent decision to lower its overnight call rate target, and generally supported the use of the scope for some further easing, if necessary, provided it is well explained to the public to maintain credibility.
  • Directors welcomed flexibility in the exchange rate and the decline in the frequency of foreign exchange market interventions, reiterating that intervention should be limited to instances where trading is exceptionally disorderly.
• Corporate sector measures:
  • Directors expressed concern that large distressed companies and the presence of nonviable firms continue to drag on the economy and be a source of vulnerability.
  • They stressed that resolution of these cases is largely a matter for creditors and investors and cautioned that the government should not intervene or provide support to nonviable companies.
  • Directors welcomed the authorities' intention to terminate the Korea Development Bank corporate bond underwriting scheme by end-2001.
  • Strengthening the bankruptcy law—including giving greater power to senior creditors—was considered a high priority; Directors urged the authorities to move quickly to prepare necessary amendments.
  • Continued improvements in corporate governance were urged to bring practices up to international best practices.
• Financial sector measures:
  • Directors noted progress in restructuring the financial sector but highlighted remaining problems largely due to corporate sector weaknesses.
  • They expressed concern that the government's role as part-owner, supervisor, and significant guarantor of corporate debt could hinder restructuring and impede development of a sound commercial banking system and a thriving capital market.
  • Directors welcomed the authorities' intention to reprivatize nationalized financial institutions and urged the planned privatization of Seoul Bank and acceleration of privatization of other bank holdings.
  • The need for further strengthening of operational capacity and risk management of banks was highlighted.
  • Directors welcomed the forthcoming Financial Sector Assessment Program to assess progress and identify remaining shortcomings.
• Repurchases and conclusion:
  • Directors welcomed the early repurchases made by Korea to the Fund, noting that all Fund credit outstanding would be repaid by the end of August 2001.
  • Directors urged the government to continue pursuing the remaining restructuring and reform agenda to contribute to an economy that is stronger, more flexible, and less vulnerable to a financial crisis, and to help ensure higher medium-term growth.

Key economic indicators (selected)

• Real GDP (percent change):
  • 1997: 5.0
  • 1998: -6.7
  • 1999: 10.9
  • 2000: 8.8
  • 2001 Staff Proj.: 3.5
• Consumption:
  • 1997: 3.2
  • 1998: -9.8
  • 1999: 9.1
  • 2000: 6.2
  • 2001 Staff Proj.: 2.5
• Gross fixed investment:
  • 1997: -2.2
  • 1998: -21.2
  • 1999: 3.7
  • 2000: 11.0
• Stock building 1/:
  • 1997: -2.0
  • 1998: -5.5
  • 1999: 5.4
  • 2000: -0.9
  • 2001 Staff Proj.: 0.0
• Net foreign balance 1/:
  • 1997: 5.7
  • 1998: 12.3
  • 1999: -0.8
  • 2000: 1.1
• Consumer prices (average):
  • 1997: 4.4
  • 1998: 7.5
  • 1999: 0.8
  • 2000: 2.3
  • 2001 Staff Proj.: 4.5
• GDP deflator:
  • 1997: 3.1
  • 1998: 5.1
  • 1999: -1.6
  • 2000: 4.3
• Unemployment rate:
  • 1997: 2.6
  • 1998: 6.8
  • 1999: 6.3
  • 2000: 4.1
• Wages, manufacturing (annual percent change):
  • 1997: -3.1
  • 1998: 14.7
  • 1999: 8.6
• Revenues 2/ (in percent of GDP):
  • 1997: 20.6
  • 1998: 21.8
  • 1999: 22.4
  • 2000: 25.8
  • 2001 Staff Proj.: 25.3
• Expenditure (in percent of GDP):
  • 1997: 22.3
  • 1998: 26.0
  • 1999: 25.7
  • 2000: 24.8
  • 2001 Staff Proj.: 25.5
• Balance 2/ 3/ (in percent of GDP):
  • 1997: -1.7
  • 1998: -4.3
  • 1999: -3.3
  • 2000: -0.2
• M3:
  • 1997: 13.9
  • 1998: 12.5
  • 1999: 8.0
  • 2000: 8.5
• Yield on corporate bonds:
  • 1997: 13.4
  • 1998: 15.1
  • 1999: 8.9
  • 2000: 10.0
• Current account balance:
  • 1997: -8.2
  • 1998: 40.4
  • 1999: 24.5
  • 2000: 9.2
• Current account balance (in percent of GDP):
  • 1997: 12.7
  • 1998: 6.0
  • 1999: 2.4
  • 2000: 2.1
• Won per U.S. dollar:
  • 1997: 951.3
  • 1998: 1,402.1
  • 1999: 1,188.9
  • 2000: 1,131.1

IMF Executive Board conclusion of Post-Program Monitoring discussion on Korea, August 1, 2001.

References

• Republic of Korea and the IMF
• Public Information Notices
• Article IV
• https://www.imf.org/en/home