IMF Executive Board Concludes 2023 Article IV Consultation with Republic of Korea

IMF Executive Board Concludes 2023 Article IV Consultation with Republic of Korea

November 16, 2023

Washington, DC: The
Executive Board of the International Monetary Fund (IMF) concluded the
Article IV consultation

^[1]

with the Republic of Korea.

Like many other advanced economies, Korea has faced challenges from
inflation and a growth slowdown. Growth declined from mid-2022, as global
demand for electronics waned and domestic demand weakened, but has started
to recover in recent quarters. Headline inflation has declined
significantly after peaking in mid-2022, though core inflation has
remained stickier. Pockets of financial sector vulnerability have emerged
amid higher interest rates and declining housing prices. Swift policy
measures have helped to stabilize financial and housing markets, and
financial risks, while having increased, appear to remain manageable.

The Korean economy is expected to strengthen amid a gradual recovery of
global semiconductor demand, a strong domestic labor market, and ongoing
stabilization of the housing market. Growth is projected to reach 1.4
percent for 2023 and 2.2 percent in 2024. The slowdown in growth of main
trading partners and higher-for-longer global interest rates act as a drag
on near-term growth, while stronger-than-previously-envisaged growth
prospects of the Chinese economy are expected to help mitigate impacts on
Korean exports. Despite a temporary rebound in recent months, inflation is
projected to continue moderating and approach the authorities’ 2 percent
target by end-2024.

The economic outlook is subject to a high degree of uncertainty, with
risks tilted to the downside. Near-term growth prospects critically depend
on the strength of the rebound of the semiconductor cycle and China’s
demand for Korean exports of goods and services. Main risks also include
weaker growth and tighter monetary policy in major economies, heightened
commodity price volatility, resurgence of global banking turmoil, reduced
trust in domestic non-bank financial institutions, and a renewed domestic
real-estate sector downturn. Moreover, Korea is vulnerable to
intensification of geo-economic fragmentation. Upside risks to growth
include a stronger rebound in global semiconductor demand and a faster
decline in global inflation.

Executive Board Assessment^[2]

Executive Directors welcomed the Korean economy’s resilience, supported by
the authorities’ effective policy response. Directors noted that growth is
expected to gradually strengthen, supported by an improved economic outlook
in key trading partners; inflation should continue to moderate; and
financial risks remain manageable. Noting high uncertainty to the outlook,
Directors agreed that the near-term policy mix should remain restrictive to
limit the rise in public debt and support disinflation. They also called
for structural reforms to reinvigorate long-term growth.

Directors agreed that monetary policy should remain restrictive for a
considerable time and remain data dependent and be carefully communicated.
They concurred that foreign exchange (FX) reserves remain adequate and
emphasized that FX interventions should remain limited to preventing
disorderly market conditions.

Directors called for continued fiscal policy normalization and welcomed the
moderate consolidation and the focus on welfare spending envisaged in the
2024 budget. Given the revenue shortfall in 2023, they welcomed the
continued execution of budgeted spending using government deposits and
funds, which should limit the drag on growth. Directors suggested better
aligning domestic energy prices with international prices to pass through
price signals and safeguard the financial health of public utilities.

Directors welcomed the policy actions that helped stabilize housing and
financial markets. They stressed that financial market support should
remain temporary and targeted, while housing-related measures should strike
a balance between preventing excessive price falls and allowing for orderly
adjustment. Noting high and rising household debt, Directors welcomed the
tightening of regulations of mortgage support programs.

Directors recommended enhancing financial resilience through stronger
buffers, regulation, and supervision. They welcomed the plans to enhance
banks’ liquidity and loss absorption capacities and improve the regulatory
and supervisory frameworks for credit cooperatives. Directors also welcomed
the initiatives to buttress the soundness of non-bank financial
institutions (NBFIs), including by narrowing regulatory gaps between NBFIs
and banks.

Directors underscored the importance of structural reforms for boosting
productivity growth in the face of demographic headwinds. They encouraged
further efforts to spur innovation, increase labor market flexibility, and
close gender gaps. A few Directors suggested increasing immigration to help
boost potential growth. Directors called for pension reform to safeguard
long-term fiscal sustainability and supported a rules-based fiscal
framework to anchor public finances. They welcomed the release of the 1
^st National Framework Plan for Carbon Neutrality and Green
Growth and recommended stronger policies to meet climate objectives.
Directors stressed that trade and investment measures should remain narrowly
targeted to specific objectives and consistent with WTO obligations. They
welcomed the authorities’ continued support for an open trade environment
and diversification efforts.

Table 1. Korea: Selected Economic Indicators, 2021-24
							Projection
					2021	2022	2023	2024
Real GDP (percent change)					4.3	2.6	1.4	2.2
	Total domestic demand				3.7	2.7	1.9	1.9
		Final domestic demand			3.8	2.6	1.5	1.9
			Consumption		4.1	4.1	1.7	1.9
			Gross fixed investment		3.2	-0.5	1.1	2.1
		Stock building 1/			-0.1	0.2	-0.1	0.0
	Net foreign balance 1/				0.6	0.2	-0.1	0.0
Nominal GDP (in trillions of won)					2,080	2,162	2,230	2,345
Saving and investment (in percent of GDP)
	Gross national saving				36.8	34.5	34.0	34.0
	Gross domestic investment				32.3	33.2	32.7	31.4
	Current account balance				4.7	1.8	1.3	2.6
Prices (percent change)
	CPI inflation (end of period)				3.7	5.0	3.2	2.0
	CPI inflation (average)				2.5	5.1	3.6	2.4
	Core inflation (average)				1.4	3.6	3.5	2.4
	GDP deflator				2.8	1.3	1.7	2.9
	Real effective exchange rate				0.1	-5.4	…	…
Trade (percent change)
	Export volume				10.7	3.6	2.5	3.5
	Import volume				12.6	4.3	0.0	3.0
	Terms of trade				-2.8	-7.4	-2.3	5.0
Consolidated central government (in percent of GDP)
	Revenue				25.7	27.1	23.9	23.9
	Expenditure				25.7	28.7	24.9	24.6
	Net lending (+) / borrowing (-)				0.0	-1.6	-1.0	-0.7
	Overall balance				-1.5	-3.0	-1.8	-1.7
	Excluding Social Security Funds				-4.4	-5.2	-3.9	-3.7
	Central government debt				45.1	47.8	49.3	50.6
Money and credit (end of period)
	Overnight call rate				1.4	3.4	…	…
	Three-year AA- corporate bond yield				2.4	5.2	…	…
	M3 growth				11.3	6.9	…	…
Balance of payments (in billions of U.S. dollars)
	Exports, f.o.b.				649.5	690.5	643.3	704.4
	Imports, f.o.b.				573.7	675.4	628.3	652.1
	Current account balance				85.2	29.8	22.2	47.2
	Gross international reserves (end of period) 2/				458.3	418.4	416.2	441.8
		In percent of short-term debt (residual maturity)			209.8	190.4	189.5	202.5
External debt (in billions of U.S. dollars)
	Total external debt (in percent of GDP)				34.7	39.7	39.4	39.3
Sources: Korean authorities; and IMF staff estimates and projections.
1/ Contribution to GDP growth.
2/ Excludes gold.