IMF Executive Board Concludes 2012 Article IV Consultation with the Republic of Korea

Public Information Notice (PIN) No. 12/110
September 20, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2012 Article IV Consultation with the Republic of Korea is also available.

On August 27, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Korea.1


After a strong rebound in 2010, the Korean economy slowed in 2011 and into 2012 in line with global economic developments. Weaknesses in the global economy, particularly the intensification of the euro area crisis, have led to a widespread slowing of growth momentum. Domestically, high household debt continues to be a drag on private consumption. Growth is therefore expected to moderate, with a small negative output gap expected to remain for the rest of 2012. The economy is projected to grow at about 3 percent in 2012, rebounding to around 4 percent in 2013. The main short-term risk to the outlook is a further escalation of the euro area crisis, which would have a significant impact on Korea.

Inflation rose and remained elevated at around 4 percent in 2011, about 1 percent above the central inflation target set by the Bank of Korea (BOK). This reflected high commodity prices and other transitory supply-side shocks as well as demand-side pressures from the earlier expansion. More recently, in line with the slowing activity and retreating commodity prices, headline inflation has decelerated to 1.5 percent in July 2012, aided by the introduction of government subsidies for child care services. Inflation expectations, however, have remained elevated at close to 3.5 percent. Headline inflation is expected to pick up in the second half of the year, averaging just below 3 percent for the year as a whole.

The external vulnerability of the Korean financial system has diminished considerably since the global financial crisis due to the concerted efforts of the authorities. This reflects higher foreign reserves relative to short-term debt, a reduction in banks’ short-term debt, the adoption of macroprudential measures designed to curb banks’ reliance on non-core wholesale funding, and the strengthening of the banks’ foreign currency liquidity positions.

Banking system indicators remain strong. Domestic banks are well capitalized, with an average capital adequacy ratio of 14 percent at end-2011. The recently introduced regulatory ceiling on loan-to-deposit ratios (of 100 percent) has been met by all domestic commercial banks.

The current macro policy mix combines an accommodative monetary policy and a broadly neutral fiscal stance. The overall balance (excluding social security funds) is expected to record a deficit of about 0.9 percent of GDP in 2012, compared with the 2011 outturn of a 1.1 percent deficit. In response to data showing a weaker-than-expected economic outlook and lower headline inflation, the Ministry of Strategy and Finance adopted a modest stimulus package in June to support the economy while the BOK cut its policy rate by 25 bps in July 2012 after putting it on hold for the past year.

Executive Board Assessment

The Executive Directors commended the authorities for adjusting macroeconomic policies and strengthening the resilience of the financial system in response to global headwinds and financial stress. Growth has decelerated and is projected to remain below potential for 2012, while inflationary pressures have receded. Directors noted that the near-term challenge is to manage the escalating downside risks to the outlook, particularly those related to a possible further intensification of the euro area crisis and its spillover.

Against this background, Directors considered that the current macroeconomic policy mix is appropriate. They supported the front-loading of budget spending in 2012 and the recent fiscal stimulus package, and welcomed the authorities’ commitment to implement the budget fully while maintaining the medium-term consolidation objectives. Directors also agreed that monetary policy should continue to be accommodative, but stressed that, in light of the elevated inflation expectations, normalization should resume once the economy strengthens and the negative output gap starts to close.

Directors noted that, in the event of a severe downside scenario, Korea has policy space to respond, especially on the fiscal side, including through limited and temporary use of government managed funds and additional discretionary spending. Korea’s flexible exchange rate and ample international reserves would also help cushion against external shocks. Noting that the won is assessed to be moderately undervalued in real effective terms, Directors welcomed the authorities’ intention to limit intervention to smoothing exchange rate fluctuations.

Directors welcomed progress in reducing external vulnerabilities in the financial system—external buffers have been strengthened, short-term debt has declined, and banks have reduced their reliance on wholesale funding. They noted nonetheless that the financial system remains subject to large swings in capital flows and funding risks. This calls for continued vigilance and efforts to enhance the effectiveness of macroprudential policies, including through improved coordination among regulatory agencies.

Noting the still high level of household debt, Directors called on the authorities to follow through with their strategy for a “soft landing,” especially by strengthening asset classification and provisioning rules for non-bank financial institutions. They welcomed the progress in restructuring insolvent mutual savings banks, and encouraged the authorities to monitor remaining balance sheet weaknesses closely. Directors looked forward to a comprehensive assessment of Korea’s financial system in the upcoming FSAP.

Directors underscored the need to address the medium-term challenges of rapid population aging and rising income inequality, and to boost potential growth. They supported the government’s plan for a targeted increase in social spending over time, which will likely require a strengthening of revenue performance, mainly by broadening the tax base. They also encouraged further efforts to improve the oversight and governance of state-owned enterprises. Continued labor market reforms should focus on enhancing workforce and creating a more conducive environment for female participation. Directors also recommended boosting service sector productivity by enhancing competition through deregulation, further SME restructuring, and creating a more level playing field for the tradable and nontaxable sectors.

Korea: Selected Economic Indicators, 2008–13
2008 2009 2010 2011 2012 2013

Real GDP (percent change)

2.3 0.3 6.3 3.6 3.0 3.9

  Total domestic demand

1.4 -2.7 6.2 2.0 2.4 3.1

    Final domestic demand

0.8 0.6 4.5 1.3 2.6 3.1


2.0 1.2 4.1 2.2 2.5 2.9

    Gross fixed investment

-1.9 -1.0 5.8 -1.1 3.1 3.6

    Stock building 1/

0.6 -3.1 1.4 0.7 -0.2 0.0

  Net foreign balance 1/

1.1 2.8 0.1 1.9 1.0 1.2

Nominal GDP (in trillions of won)

1,026.5 1,065.0 1,173.3 1,237.1 1,318.4 1,411.8

Saving and investment (in percent of GDP)


  Gross national saving

31.6 30.2 32.4 31.8 31.2 31.3

  Gross domestic investment

31.2 26.3 29.5 29.5 29.2 29.6

  Current account balance

0.3 3.9 2.9 2.4 2.0 1.7

Prices (percent change)


  CPI inflation (end of period)

4.1 2.8 3.0 4.2 2.8 3.1

  CPI inflation (average)

4.7 2.8 2.9 4.0 2.8 3.2

  Core inflation (average)

4.3 3.6 1.8 3.2 2.2 3.0

  GDP deflator

2.9 3.4 3.6 1.7 3.5 3.0

  Real effective exchange rate

-19.9 -12.5 11.4

Trade (percent change)


  Export volume

6.8 0.1 16.2 11.6 5.6 10.0

  Import volume

0.9 -2.2 16.8 5.5 4.0 10.9

  Terms of trade

-14.3 10.8 -0.9 -8.2 -2.2 0.1

Consolidated central government (in percent of GDP)



24.0 23.0 22.7 23.4 23.5 23.5


22.4 23.0 21.0 21.6 21.5 20.8

  Net lending (+) / borrowing (-)

1.6 0.0 1.7 1.8 2.0 2.7

  Overall balance

1.5 -1.7 1.4 1.5 1.6 2.4

    Excluding Social Security Funds

-1.1 -4.1 -1.1 -1.1 -0.9 0.0

Money and credit (end of period)


  Overnight call rate 2/

2.9 2.0 2.5 3.3 3.0

  Three-year AA- corporate bond yield 2/

7.7 5.5 4.3 4.2 3.4

  M3 growth 3/

9.1 9.4 5.9 6.6 8.3

Balance of payments (in billions of U.S. dollars)


  Exports, f.o.b.

434.7 358.2 461.4 552.6 577.9 633.8

  Imports, f.o.b.

429.5 320.3 421.4 521.6 549.1 606.1

    Oil imports

85.9 50.8 68.7 100.8 101.0 96.3

  Current account balance

3.2 32.8 29.4 26.5 22.5 21.0

  Gross international reserves (end of period)

201.1 269.9 291.5 304.2 319.2 334.3

    In percent of short-term debt (residual maturity)

111.7 146.2 162.6 165.9 167.4 168.2

External debt (in billions of U.S. dollars)


  Total external debt (end of period)

317.4 345.7 359.4 398.4 419.4 440.3

    Of which: Short-term (end of period)

149.9 149.2 139.8 136.1 140.5 145.7

  Total external debt (in percent of GDP)

34.0 41.5 35.4 35.7 36.7 36.4

  Debt service ratio 4/

7.9 7.8 6.8 6.4 7.4 7.3

Sources: Korean authorities; and IMF staff estimates and projections.

1/ Contribution to GDP growth; 2/ Data for 2012 are as of July 5; 3/ Data for 2012 are as of April. 4/ Debt service on medium- and long-term debt in percent of exports of goods and services.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here:


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