IMF cuts Korea’s growth outlook to 3%

By Kim Jae-won

The International Monetary Fund (IMF) said Thursday that it has lowered Korea’s economic growth outlook by a quarter of a percentage point to 3 percent this year, citing lingering uncertainties in the global economy, in particular, a possible escalation of the European debt crisis.

“Korea is expected to grow by 3 percent this year _ below its growth potential _ and then around 4 percent in 2013, although continued weakness in the global economy may make this difficult to achieve,” said the international economic organization in its report.

The IMF initially forecast that Asia’s fourth-largest economy would grow 3.5 percent this year, but shaved it to 3.25 percent in June after the agency’s research team visited the country for two weeks.

IMF economists say that an escalation of the euro area crisis could still cause Korean banks to experience difficulty rolling over their debt, despite their reduced dependence on wholesale funding.

The IMF stressed the importance of monthly stress tests undertaken by the Korean financial authorities on the foreign currency liquidity positions of domestic banks. It said the vulnerability of foreign bank branches, resulting from their reliance on parent funding, needs to be monitored closely.

The agency’s move is in line with other economic think tanks both at home and abroad, which rushed to cut the country’s gross domestic product growth rate to less than 3 percent. The Korea Development Institute, one of key economic think tanks here, cut the nation’s economic growth rate sharply to 2.5 percent earlier this week from its earlier projection of 3.6 percent.

The IMF, however, welcomed Korea’s plans to increase the country’s social spending to improve on income inequality and the welfare of poorer groups in society, while preserving medium-term fiscal consolidation objectives.

Hoe Ee Khor, IMF mission chief for Korea, said in a statement that the increase in social spending would probably require further broadening of the tax base and perhaps raising tax rates in some areas, although there may also be some scope for expenditure reprioritization.

The IMF also stressed the need for labor market reform and enhancing service sector productivity. They said the labor force participation rate also needed to be improved, with greater numbers of women joining the workforce to boost potential growth.

The government has already announced a modest fiscal stimulus package, and cut the monetary policy rate to support the economy in response to a weaker-than-expected growth outlook.

“We believe this step is appropriate given global weakness and heightened uncertainties, but a normalization of monetary policy stance will be needed in 2013 if the economy returns to a growth trend as projected” said Khor.