IMF Executive Board Concludes 2016 Article IV Consultation with the Republic of Korea
IMF News, August 12, 2016
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- Published: August 12, 2016
Major findings and challenges
- After decades of impressive progress, Korea’s growth has slowed and faces structural headwinds: unfavorable demographics; heavy export reliance; pockets of corporate vulnerabilities; labor-market distortions; lagging productivity; a limited social safety net; and high household debt.
- Inequality and poverty are of concern.
- Korea has considerable fiscal space to manage these challenges.
- Growth has been sluggish since 2012 due to a series of shocks and a steady decline in growth potential.
- Authorities responded with fiscal and monetary support and measures to contain rapid household debt increase.
- Activity picked up in the second half of 2015 but slowed again in Q1 2016 due to expiry of a consumption tax cut (later extended), weaker fixed investment, and payback in inventory accumulation.
Growth outlook and macro dynamics
- Growth projections:
- Real GDP (percent change): 2012: 2.3; 2013: 2.9; 2014: 3.3; 2015: 2.6; 2016: 2.7; 2017: 3.0.
- The anticipated pickup in activity is based on growing private consumption, a stronger housing market, and the impact of fiscal and monetary easing.
- Export prospects are expected to remain difficult, weighing on fixed investment.
- Credit is expected to continue to grow (partly reflecting interest rate cuts) but at a slower pace consistent with tightening prudential measures and envisaged moderation in construction investment after 2017.
Executive Board assessment and policy recommendations
- Directors commended Korea’s achievements but noted structural constraints: rapid population aging, heavy export reliance, rising corporate vulnerabilities, labor market segmentation, and lagging productivity.
- Structural reforms were strongly supported to raise growth potential.
- Fiscal policy:
- Given low public debt, fiscal support can be used to incentivize structural reforms, cushion adverse effects, and support growth.
- A carefully targeted expansion of social expenditure over the medium term could help reduce poverty and inequality, bolster consumption, and raise productivity.
- Directors acknowledged the authorities’ aim to safeguard long-run fiscal sustainability in view of demographic change and possible reunification.
- Views differed: some Directors saw room for higher social spending without offsetting revenue or cuts; others felt additional spending should be budget neutral or met by revenue enhancement.
- Directors welcomed consideration of a fiscal rule to anchor fiscal sustainability over the medium term.
- Corporate sector:
- Directors supported authorities’ efforts on corporate restructuring and urged timely implementation for distressed firms while ensuring an adequate social safety net for affected workers.
- They welcomed the plan to recapitalize the policy banks, while stressing sufficient budgetary resources and the need to unwind the Bank of Korea bridge financing.
- Labor market and structural reforms:
- Labor market reforms are critical to address segmentation and boost female labor force participation.
- Promote competition in the service sector and among small and medium enterprises to raise productivity.
- Support the authorities’ strategy to develop a “creative economy” by fostering innovation.
- Monetary and macroprudential policy:
- Fiscal and monetary policies should remain supportive given weak conjuncture and downside risks; Directors welcomed announced fiscal stimulus and recent policy rate cut.
- A few Directors warned about effectiveness and potential implications of further stimulus.
- Recommended tightening and harmonizing macroprudential standards across banks and nonbanks to contain household debt risks.
- External sector:
- Some Directors called for a more explicit focus on reducing the current account surplus.
- Directors stressed continuing to allow the exchange rate to move flexibly to facilitate rebalancing and adjustment to shocks; recommended limiting intervention to address disorderly markets and encouraged disclosure of such interventions.
- Directors supported easing capital flow management measures.
Key quantitative indicators (selected)
- Real GDP (percent change): 2012: 2.3; 2013: 2.9; 2014: 3.3; 2015: 2.6; 2016 (proj): 2.7; 2017 (proj): 3.0.
- Total domestic demand (percent change): 2012: 1.2; 2013: 0.7; 2014: 2.5; 2015: 3.7; 2016 (proj): 2.4.
- Final domestic demand (percent change): 2014: 1.4; 2015: 3.4.
- Consumption (percent change): 2014: 2.2; 2015: 2.0; 2016 (proj): 3.5.
- Gross fixed investment (percent change): 2012: -0.5; 2013: 3.8; 2014: 3.6; 2015: 3.2.
- Stock building 1/ (contribution to GDP growth): 2012: -0.1; 2013: -1.7; 2014: 0.0; 2015: 0.8.
- Net foreign balance 1/ (contribution to GDP growth): 2012: 1.6; 2013: 1.5; 2014: 0.4; 2015: -1.2; 2016 (proj): -0.3.
- Nominal GDP (in trillions of won): 2012: 1,377; 2013: 1,429; 2014: 1,486; 2015: 1,559; 2016 (proj): 1,622; 2017 (proj): 1,697.
- Gross national saving (percent of GDP): 2012: 35.2; 2013: 35.3; 2014: 36.2; 2015: 36.3; 2016 (proj): 35.6.
- Gross domestic investment (percent of GDP): 2012: 31.0; 2013: 29.1; 2014: 29.3; 2015: 28.5; 2016 (proj): 28.8; 2017 (proj): 29.2.
- Current account balance (percent of GDP): 2012: 4.2; 2013: 6.2; 2014: 6.0; 2015: 7.7; 2016 (proj): 7.5; 2017 (proj): 6.5.
- CPI inflation (end of period): 2012: 1.1; 2013: 1.3.
- CPI inflation (average): 2012: 1.9; 2013: 1.7 (core inflation (average) entry shows 1.7).
- GDP deflator (percent change): 2012: 1.0; 2013: 0.9; 2014: 0.6.
- Real effective exchange rate: 2012: 9.2; 2013: 6.6.
- Trade (percent change) — Export volume: 2012: 5.6; 2013: 4.8; 2014: 4.4.
- Trade (percent change) — Import volume: 2012: 0.5; 2013: 4.3; 2014: 4.7; 2015: 3.1; 2016 (proj): 2.8.
- Terms of trade: 2012: 12.0; 2013: -1.8.
- Consolidated central government (in percent of GDP) — Revenue: 2012: 22.1; 2013: 21.5; 2014: 21.2; 2015: 21.3; 2016 (proj): 22.0; 2017 (proj): 21.7.
- Consolidated central government (in percent of GDP) — Expenditure: 2012: 20.6; 2013: 20.9; 2014: 20.8; 2015: 21.0; 2016 (proj): 21.1.
- Consolidated central government (in percent of GDP) — Net lending (+) / borrowing (-): 2012: 0.3.
- Overall balance Excluding Social Security Funds (in percent of GDP): 2012: -1.3; 2013: -1.5; 2014: -2.0; 2015: -2.4; 2016 (proj): -2.3.
- General government debt (percent of GDP): 2012: 32.2; 2013: 34.3; 2014: 35.9; 2015: 37.9; 2016 (proj): 38.7; 2017 (proj): 39.0.
- Money and credit (end of period) — Credit growth: 2012: 7.4; 2013: 7.6; 2014: 6.7.
- Money and credit (end of period) — M3 growth: 2012: 7.8; 2013: 8.7; 2014: 9.0.
- Balance of payments (in billions of U.S. dollars) — Exports, f.o.b.: 2012: 603.5; 2013: 618.2; 2014: 613.0; 2015: 548.8; 2016 (proj): 521.5; 2017 (proj): 541.9.
- Balance of payments (in billions of U.S. dollars) — Imports, f.o.b.: 2012: 554.1; 2013: 535.4; 2014: 524.1; 2015: 428.5; 2016 (proj): 398.1; 2017 (proj): 423.7.
- Oil imports (in billions of U.S. dollars): 2012: 108.3; 2013: 99.3; 2014: 94.9; 2015: 55.1; 2016 (proj): 47.7; 2017 (proj): 57.4.
- Gross international reserves (end of period, in billions of U.S. dollars) 2/: 2012: 323.2; 2013: 341.7; 2014: 358.8; 2015: 363.2; 2016 (proj): 350.9; 2017 (proj): 334.8.
- In percent of short-term debt (residual maturity): 2012: 181.0; 2013: 203.5; 2014: 208.8; 2015: 228.4; 2016 (proj): 230.8; 2017 (proj): 230.5.
- External debt (in billions of U.S. dollars) — Total external debt (end of period): 2012: 408.9; 2013: 423.5; 2014: 424.4; 2015: 395.4; 2016 (proj): 384.2; 2017 (proj): 374.8.
- External debt — Short-term (end of period): 2012: 128.0; 2013: 111.8; 2014: 116.4; 2015: 107.1; 2016 (proj): 101.1.
- Total external debt (in percent of GDP): 2012: 33.4; 2013: 32.4; 2014: 30.1; 2015: 28.7; 2016 (proj): 27.9; 2017 (proj): 26.1.
- Debt service ratio 3/ (percent): 2012: 7.0; 2013: 7.2; 2014: 7.9; 2015: 8.9; 2016 (proj): 8.6.
IMF Communications Department — Press Release No. 16/377, August 12, 2016. Executive Board meeting concluded July 29, 2016.