Press Release No. 06/123

Press Release: Statement by IMF Staff at the Conclusion of the 2006 Article IV Consultation Discussions with Korea

June 9, 2006

The following statement was issued in Seoul on June 8 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 25-June 8 to hold Article IV consultation discussions. The mission met with a wide range of people, from the private sector as well as the government, to discuss the immediate economic outlook and the policies needed to promote long-term growth.

"In the mission's view, the immediate outlook is bright. We believe that Korea's economy will grow by about 5½ percent this year, somewhat faster than the government expects. The main reason for our optimism is that Korea is continuing to benefit from its integration into the world economy. Exports are growing rapidly, because the global economic expansion is creating a strong demand for Korea's products, such as its electronics, cars, and ships. Meanwhile, domestic demand is robust, ensuring that growth remains well-balanced.

"The outlook, however, is not without risks. Given Korea's heavy dependence on imported oil, higher oil prices could constrain growth. In addition, a tightening of global financial conditions could lead to higher domestic interest rates, which would put renewed pressures on highly-indebted households and small- and medium-sized enterprises. To guard against the risks from higher interest rates, financial institutions should be encouraged to share more information with credit bureaus, because such information would allow lenders to respond to risks in a precise fashion, rather than by bluntly curbing credit, thereby endangering growth.

"Over the longer-term, Korea faces a significant challenge, because the population is aging while competition from the rest of the region is growing. How should Korea respond? The answer, in our view, lies in furthering Korea's integration into the world economy. Just as the manufacturing sector was thrust into the global arena a few decades ago, with great success, now the same remedy is necessary for the service sector. We would emphasize:

• An advanced economy requires an advanced financial sector, which necessitates liberalizing the foreign exchange system and deregulating the capital markets. At the same time, regulations need to be put in place to prevent conflicts of interest, and heavy sanctions need to be imposed if violations of these regulations occur.

• There is also a need to open up and deregulate non-financial services.

• Finally, Korea also faces significant long-term fiscal challenges related to the aging of its population. In particular, we would emphasize the importance of restoring the national pension system to financial health.

"In sum, Korea is moving in the right direction, taking steps to create a knowledge-based economy for the 21^st century. For this reason, we remain optimistic about the country's economic future. These conclusions will be elaborated in our annual consultation report which will be presented to the IMF Executive Board later this year."