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.


[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.

[2] 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 summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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