IMF Presses Korea to Continue Rebalancing Economy

Korea is a heavily export-dependent economy and was severely hit by the global fall in demand following the worldwide slump. The country suffered its largest drop in exports on record and at the low point in January 2009, exports were down 35 percent from the previous year.

In its annual report on the state of the Korean economy, the IMF said the weak demand from Western consumers now, and into the foreseeable future, had increased the need for Asia's fourth largest economy to move away from its export-led growth model.

"Looking ahead, a key medium-term challenge will be to rebalance growth toward nontradables and make the services sector an additional engine of growth, " said IMF mission chief for Korea Subir Lall.

Call to maintain expansionary policies

Following its Article IV consultation with Korean authorities that ended on July 7, the IMF commended their response to the crisis. Despite a brightening economic outlook, it called on Seoul to maintain its expansionary policy into 2010.

IMF Directors "agreed that macroeconomic policies should continue to focus on supporting growth until a self-sustained recovery is firmly established," they said in a statement.

Following the financial stress, the Korean economy contracted by 5.1 percent in the last quarter of 2008 from the previous three months-among the sharpest contractions worldwide. Korean authorities responded by implementing a sizeable and frontloaded fiscal stimulus package and monetary easing.

The stimulus measures had a stronger than anticipated impact, boosting confidence and supporting economic activity. This, together with the depreciation of the South Korean currency, the won, has caused the IMF to adjust its growth projections for 2009 from -3 percent to -1 ¾ percent.

However, the report suggests the less gloomy outlook will be tempered as external demand remains sluggish and the impact from the stimulus measure and export gains from the depreciation of the currency begin to fade. The IMF forecasts the economy to grow at 2.5 percent in 2010.

Indebted business, households

The recent recession has posed the biggest economic challenge to this northeast Asian country since the 1997-98 Asian crisis. This time around, a recovery is likely to be dampened by highly leveraged households and small and medium-sized enterprises (SMEs) and the sluggish pace of global recovery.

Following the...