Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Korea on March 17, 2021.
The Korean economy has weathered the COVID-19 pandemic comparatively well, supported by its sound macroeconomic fundamentals, a timely and effective public health response, and the deployment of a comprehensive set of fiscal, monetary, and financial measures. As a result, Korea’s economic contraction in 2020 was smaller than in most other advanced economies, with real GDP declining by 1 percent.
Activity has been recovering since Q2-2020, supported by a rebound in exports-especially of high-tech products-and resilient investment in machinery and equipment. By contrast, services activity and consumption have been sluggish, and employment is still significantly below its pre-COVID level. With substantial COVID-19 response measures, the overall fiscal deficit for 2020 widened to an estimated 4.1 percent of GDP. Credit growth has remained strong, financial markets have normalized quickly, and financial sector soundness indicators have shown relatively little impact from the pandemic to date. Inflation remained below 1 percent despite recent rises in food and fuel prices. The current account balance increased to 4.6 percent of GDP in 2020, from 3.6 percent in 2019, on strong tech exports and a narrowing of the services deficit due to travel restrictions.
The outlook is for a recovery in 2021 with real GDP projected to grow 3.6 percent, supported by a gradual normalization of COVID-related factors and stronger external demand. This incorporates the impact of the recently proposed supplementary budget, raising the forecast from the previous 3.4 percent when the staff report was finalized.
With output and employment below potential, inflation is forecast at 1.2 percent in 2021 despite higher oil prices, which are projected to contribute to a narrowing of the current account surplus to 3.8 percent of GDP. Uncertainty surrounding the outlook remains high, mostly hinging on COVID-related risks in both directions. Renewed surges in infections and slower vaccinations-either domestically or abroad-are the principal downside risk to the economy, while faster-than-expected virus containment and continued resilient external demand are the main upside risks.
Executive Board Assessment [2]
Executive Directors commended Korea’s effective COVID-19 containment measures and comprehensive economic policy response, which, along with sound macroeconomic fundamentals, have allowed the economy to weather the pandemic shock comparatively well and should help minimize the risks of long-term economic scarring. They were encouraged by the ongoing economic recovery, while observing that the outlook is subject to high uncertainty. Going forward, Directors underscored the need for continued supportive macroeconomic policies to help the economy normalize faster, safeguard financial stability, and foster greener and more inclusive growth.
Directors agreed that fiscal policy should remain expansionary over the near term. They welcomed the authorities’ recent announcement of a proposed supplementary budget, which would enable a positive fiscal impulse for the current year by raising transfers targeted to affected workers and firms, and provide resources for COVID-19 vaccinations. They observed that this expansion could be offset by gradual consolidation in subsequent years, anchored on the proposed rules-based fiscal framework. Directors noted that an independent council to monitor and review implementation of the proposed fiscal rule would enhance its credibility.
Directors viewed the monetary easing in 2020 as appropriate and agreed that monetary policy should remain accommodative. Most Directors considered the current monetary stance as broadly appropriate given the need to balance macroeconomic conditions and financial stability risks, while a few saw merit in additional easing to help underpin the recovery and bring inflation closer to target.
Directors welcomed the steps taken following the COVID outbreak to sustain credit flows, especially to small businesses, and agreed that credit support programs should be maintained until the economy recovers more broadly.
Directors viewed the financial system as resilient overall, supported by a macroprudential policy stance that is appropriate given the level of risks. They concurred that while several factors mitigate financial stability risks from high household debt, the introduction of a sectoral capital buffer on household exposures would further strengthen the resilience of banks to potential losses. Directors also encouraged the authorities to be prepared to tighten prudential policies further in the event of continued rapid household credit growth, and to closely monitor pressures in the real estate market. They welcomed recent measures to strengthen resilience among non-bank financial institutions.
Directors were encouraged by the authorities’ strategy to develop new growth drivers through the Korean New Deal, which would facilitate a digital, greener, and more inclusive economy. They encouraged the authorities to take complementary steps to boost potential growth by reducing entry barriers, fostering innovation, and tackling labor market rigidities, particularly to support women and youth. Welcoming Korea’s ambitious climate change mitigation objectives, Directors underscored the importance of carbon pricing to provide robust incentives for green investment.
Table 1. Korea: Selected Economic Indicators, 2018-211 | ||||
Estimates | Projections | |||
2018 | 2019 | 2020 | 2021 | |
Real GDP (percent change) | 2.9 | 2.0 | -1.0 | 3.4 |
Total domestic demand | 2.0 | 1.2 | -1.3 | 1.9 |
Final domestic demand | 1.7 | 1.1 | -0.8 | 1.9 |
Consumption | 3.7 | 2.9 | -2.4 | 1.2 |
Gross fixed investment | -2.2 | -2.8 | 2.6 | 3.2 |
Stock building 2/ | 0.3 | 0.2 | -0.5 | 0.1 |
Net foreign balance 2/ | 1.0 | 1.0 | 0.4 | 1.6 |
Nominal GDP (in trillions of won) | 1,898 | 1,919 | 1,921 | 1,988 |
Saving and investment (in percent of GDP) | ||||
Gross national saving | 36.0 | 35.0 | 36.2 | 36.6 |
Gross domestic investment | 31.5 | 31.3 | 31.6 | 32.8 |
Current account balance | 4.5 | 3.6 | 4.6 | 3.8 |
Prices (percent change) | ||||
CPI inflation (end of period) | 1.3 | 0.7 | 0.5 | 1.2 |
CPI inflation (average) | 1.5 | 0.4 | 0.5 | 1.4 |
Core inflation (average) | 1.2 | 0.7 | 0.4 | … |
GDP deflator | 0.5 | -0.9 | 1.1 | 0.0 |
Real effective exchange rate | 1.0 | -4.6 | -1.9 | … |
Trade (percent change) | ||||
Export volume | 6.1 | -2.1 | 0.9 | 10.5 |
Import volume | 2.0 | -0.8 | 0.0 | 7.7 |
Terms of trade | -5.2 | -4.1 | 3.8 | -5.5 |
Consolidated central government (in percent of GDP) | ||||
Revenue | 22.9 | 23.0 | 22.9 | 22.8 |
Expenditure | 20.4 | 22.6 | 25.7 | 25.1 |
Net lending (+) / borrowing (-) | 2.6 | 0.4 | -2.8 | -2.2 |
Overall balance | 1.6 | -0.6 | -4.2 | -3.6 |
Excluding Social Security Funds | -0.6 | -2.8 | -6.1 | -5.5 |
General government debt | 40.0 | 42.2 | 48.7 | 52.8 |
Money and credit (end of period) | ||||
Overnight call rate | 1.9 | 1.4 | 0.5 | … |
Three-year AA- corporate bond yield | 2.3 | 1.9 | 2.2 | … |
Credit growth | 7.9 | 9.0 | 9.2 | 4.3 |
Balance of payments (in billions of U.S. dollars) | ||||
Exports, f.o.b. | 626.3 | 556.7 | 516.6 | 596.9 |
Imports, f.o.b. | 516.2 | 476.9 | 434.7 | 518.1 |
Current account balance | 77.5 | 59.7 | 75.3 | 67.4 |
Gross international reserves (end of period) 3/ | 398.9 | 404.0 | 438.3 | 440.8 |
In percent of short-term debt (residual maturity) | 218.7 | 207.9 | 193.3 | 204.3 |
External debt (in billions of U.S. dollars) | ||||
Total external debt (in percent of GDP) | 25.6 | 28.4 | 33.3 | 31.3 |
Sources: Korean authorities; and IMF staff estimates and projections. | ||||
1/ This reflects the available information and projections when the 2021 Article IV Consultation staff report was finalized. It does not incorporate the impact of the subsequently announced supplementary budget. | ||||
2/ Contribution to GDP growth. | ||||
3/ 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: https://www.IMF.org/external/np/sec/misc/qualifiers.htm .