{
  "title": "Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with the Republic of Korea",
  "publication": "IMF News, August 9, 2009",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/pn09103",
  "canonical": "https://www.imf.org/en/news/articles/2015/09/28/04/53/pn09103",
  "overlayPath": "/en/news/articles/2015/09/28/04/53/pn09103/index.md",
  "summary": "Each Public Information Notice contains a background section, a table of selected economic indicators, and an Executive Board assessment.",
  "publishDate": "2009-08-09",
  "sections": [
    {
      "heading": "Background",
      "content": "- Korea was hit hard by the global financial crisis towards the last quarter of 2008; capital left the country at a faster pace than during the 1997-98 crisis, causing sharply lower asset prices, dislocations in money markets, and a spike in bank CDS spreads.\n- The Korean economy contracted by 5.1 percent quarter/quarter (not annualized) in the last quarter of 2008.\n- Policy responses:\n  - US$55 billion in foreign exchange reserves set aside to provide swaps or loans to banks and trade-related businesses.\n  - Bank of Korea (BOK) cut interest rates by a cumulative 325 basis points between October and February and relaxed conditions for its repo operations.\n  - A 2009 fiscal stimulus package equivalent to 3.6 percent of GDP.\n  - Generous quasi-fiscal support for SMEs, mostly in the form of credit guarantees.\n  - A bank recapitalization fund and a toxic asset fund were set up to shield the banking sector and prevent major deleveraging.\n- Exchange rate and reserves:\n  - BOK intervened only exceptionally; secured swap lines from other central banks totaling US$90 billion.\n  - Reserves declined by US$38 billion in the last quarter of 2008 to US$200 billion and have since recovered.\n  - The steep won depreciation helped redirect domestic demand from imports to domestic production and, with falling oil prices, turned the current account into a solid surplus in the first quarter of 2009.\n- Inflation and activity:\n  - Core inflation at 3.5 percent in June; headline inflation declined to 2 percent.\n  - External defaults and a credit crunch were avoided; economic activity stabilized in Q1 2009.\n  - Bank credit continues to grow at a healthy pace; domestic bond issuance in the first five months of 2009 (relative to GDP) is close to an all-time high.\n  - In Q1 2009, government consumption, construction investment, and private consumption rose; the economy expanded by 0.1 percent q/q.\n- Outlook and risks:\n  - Growth projected at -1¾ percent in 2009 and 2.5 percent in 2010.\n  - Recovery likely to moderate in H2 2009 and be followed by a drawn-out recovery as fiscal impulse and exchange-rate effects fade.\n  - Downside risks: another bout of global risk aversion, rising oil prices, permanently higher savings rates in Western economies reducing demand.\n  - Upside risk: stronger impact from stimulus measures in Korea and abroad."
    },
    {
      "heading": "Executive Board Assessment — Key Findings",
      "content": "- Directors noted that Korea was hard hit despite strong macroeconomic policies and limited direct financial sector exposure to subprime assets.\n- Commendation for speedy and comprehensive measures that stabilized the economy and financial system.\n- Recovery dependence:\n  - Recovery hinges critically on external demand and global financial conditions due to highly leveraged households and SMEs.\n  - Continued focus on supporting growth until a self-sustained recovery is firmly established was recommended.\n- Fiscal policy:\n  - Directors supported the sizeable and frontloaded fiscal stimulus package and the intention to maintain fiscal stimulus in 2010 given uncertainty.\n  - Noted distortionary nature of quasi-fiscal SME support and welcomed plan to withdraw such support gradually as conditions permit.\n  - Directors looked forward to announcement of a medium-term fiscal consolidation plan with concrete revenue and expenditure measures.\n- Monetary policy and housing:\n  - Current accommodative monetary policy stance deemed appropriate.\n  - Vigilant monitoring of monetary conditions necessary; asset price impacts should be considered in monetary policy deliberations.\n  - Rising house prices concerns best addressed through prudential regulations, pending housing market reforms.\n- Exchange rate and reserves:\n  - Staff assessed the won as undervalued relative to its medium-term equilibrium level; expected to reverse as capital inflows resume.\n  - Directors endorsed Korea’s free floating exchange rate regime; foreign exchange intervention should remain limited to smoothing volatility.\n  - Some Directors praised large reserve buffers for providing liquidity and confidence; a few Directors pointed to potential costs of holding excessive reserves from the global perspective.\n- Financial sector resilience:\n  - Financial system well-positioned to withstand deterioration in asset quality associated with the downturn.\n  - Preemptive bank recapitalization succeeded in preventing a credit crunch; establishment of an impaired asset purchase fund welcomed.\n  - Importance of linking future capital injections more clearly to progress on bank-led SME restructuring underscored.\n  - Given increased reliance on wholesale funding, consideration should be given to introducing prudential regulations limiting banks’ wholesale financing, and improving stress testing by banks and regulators.\n- Crisis framework and insolvency:\n  - Crisis response framework worked well.\n  - Encouraged consideration of a more formal approach to coordinating financial policies and sharing information among the government, financial regulators, and the central bank.\n  - Recommended further improvements to the insolvency regime, including decriminalizing personal bankruptcies.\n- Structural reform priorities:\n  - Urgent need to rebalance growth toward the nontradable sector.\n  - Priority measures: eliminating the preferential tax treatment of the manufacturing sector, deregulating the service sector, and expediting SME restructuring.\n  - Labor market reforms: reducing employment protection for regular workers and expanding social protection for nonregular workers to improve labor market flexibility."
    },
    {
      "heading": "IMF Staff Projections and Key Statistics (2005–10)",
      "content": "- Real GDP (percent change):\n  - 2005: 4.0\n  - 2006: 5.2\n  - 2007: 5.1\n  - 2008: 2.2\n  - 2009: -1.8\n  - 2010: 2.5\n- Consumption (percent change):\n  - 2005: 4.6\n  - 2006: 1.6\n  - 2007: -1.4\n  - 2008: 1.3\n  - 2009: [not provided in table cells]\n- Gross fixed investment (percent change):\n  - 2005: 1.9\n  - 2006: 3.4\n  - 2007: 4.2\n  - 2008: -1.7\n  - 2009: -6.4\n- Net foreign balance (contribution to GDP growth) 1/:\n  - 2005: 0.3\n  - 2006: 0.7\n  - 2007: 1.1\n  - 2008: 2.7\n  - 2009: [not provided in table cells]\n- Prices (percent change):\n  - Consumer prices (end of period):\n    - 2005: 2.6\n    - 2006: 2.1\n    - 2007: 3.6\n    - 2008: 4.1\n    - 2009: 1.7\n    - 2010: 3.0\n  - GDP deflator:\n    - 2005: -0.1\n    - 2006: 3.2\n- Labor market (in percent):\n  - Unemployment rate:\n    - 2005: 3.7\n    - 2006: 3.5\n    - 2007: 3.3\n    - 2008: 3.8\n  - Wage growth, manufacturing:\n    - 2005: 7.8\n    - 2006: 5.6\n    - 2007: 6.8\n    - 2008: 6.0\n    - 2009: 5.0\n- Consolidated central government (In percent of GDP):\n  - Revenues 2/:\n    - 2005: 22.1\n    - 2006: 23.1\n    - 2007: 25.0\n    - 2008: 24.5\n    - 2009: 23.7\n    - 2010: 22.7\n  - Expenditure:\n    - 2005: 20.3\n    - 2006: 21.3\n    - 2007: 21.5\n    - 2008: 23.3\n    - 2009: 26.6\n    - 2010: 26.8\n  - Balance 2/:\n    - 2005: 1.8\n    - 2006: 1.2\n    - 2007: -2.9\n    - 2008: -4.0\n- Money and interest rates (in percent):\n  - Overnight call rate:\n    - 2005: 2.9\n  - M3 growth:\n    - 2005: 7.4\n    - 2006: 10.5\n    - 2007: 10.0\n    - 2008: 9.1\n  - Yield on corporate bonds:\n    - 2005: 5.5\n    - 2006: 5.3\n    - 2007: 7.7\n- Balance of payments:\n  - Current account balance (In billions of U.S. dollar):\n    - 2005: 15.0\n    - 2006: 5.4\n    - 2007: 5.9\n    - 2008: 25.6\n    - 2009: 17.9\n    - 2010: 0.6\n    - [additional cell:] -0.7\n- Won per U.S. dollar (Period average):\n  - 2005: 1024\n  - 2006: 955\n  - 2007: 929\n  - 2008: 1102\n\nPublic Information Notice (PIN) No. 09/103 — August 9, 2009. Executive Board conclusion of the 2009 Article IV Consultation with the Republic of Korea.\n\n---\n\n\n References\n\n- Republic of Korea and the IMF\n- Public Information Notices\n- https://www.imf.org/external/mmedia/view.asp?eventID=1564\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn09103"
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    "Published: August 9, 2009",
    "Korea was hit hard by the global financial crisis towards the last quarter of 2008; capital left the country at a faster pace than during the 1997-98 crisis, causing sharply lower asset prices, dislocations in money markets, and a spike in bank CDS spreads.",
    "The Korean economy contracted by 5.1 percent quarter/quarter (not annualized) in the last quarter of 2008.",
    "Policy responses:",
    "Exchange rate and reserves:",
    "Inflation and activity:",
    "Outlook and risks:",
    "Directors noted that Korea was hard hit despite strong macroeconomic policies and limited direct financial sector exposure to subprime assets.",
    "Commendation for speedy and comprehensive measures that stabilized the economy and financial system.",
    "Recovery dependence:",
    "Fiscal policy:",
    "Monetary policy and housing:",
    "Exchange rate and reserves:",
    "Financial sector resilience:",
    "Crisis framework and insolvency:",
    "Structural reform priorities:",
    "Real GDP (percent change):",
    "Consumption (percent change):",
    "Gross fixed investment (percent change):",
    "Net foreign balance (contribution to GDP growth) 1/:",
    "Prices (percent change):",
    "Labor market (in percent):",
    "Consolidated central government (In percent of GDP):",
    "Money and interest rates (in percent):",
    "Balance of payments:",
    "Won per U.S. dollar (Period average):",
    "[Republic of Korea and the IMF](http://www.imf.org/external/country/KOR/index.htm)",
    "[Public Information Notices](https://www.imf.org/en/news/searchnews)",
    "[https://www.imf.org/external/mmedia/view.asp?eventID=1564](https://www.imf.org/external/mmedia/view.asp?eventID=1564)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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