IMF warns of growing headwinds to Korean economy
Tarhan Feyzioglu, center, the head of the IMF mission, announces its analysis of and suggestions for the Korean economy at a press conference in Seoul, Tuesday. Yonhap
Organization suggests rate cuts, extra budget
By Park Hyong-ki
The country's policymakers should execute a large extra budget and credit easing policy in the face of slowing growth amid weakening exports, a group of economists from the International Monetary Fund (IMF) said Tuesday.
Even though the economy remains fundamentally strong and resilient, the IMF mission recommended the Bank of Korea (BOK) consider lowering its key base rate.
It said a further accommodative move would not raise concerns over foreign capital outflows as the country implements a flexible currency policy.
Also, the Ministry of Economy and Finance should spend “big” through an expansionary fiscal policy to support growth.
“If the BOK lowers the interest rate, we don't think it will lead to capital outflows because, at the end of the day, the won is flexible,” Tarhan Feyzioglu, the head of the IMF mission to Korea, said at a press conference in Seoul.
“There are dark clouds now, and part of those is coming from outside as exports are slowing down. We have been hearing negative news for quite a while. We encourage the government to have a large supplementary budget issued as early as possible to support growth.”
He added it is really up to the central bank to decide on the future direction of its monetary policy by relying on data.
However, a rate cut would not exacerbate the country's high household debt because the policymakers implement “strong” macroprudential measures.
“I would like to highlight that the macroprudential policy is working well in Korea. It is working so well in Korea that it is used as an example for other countries,” Feyzioglu said.
“The authorities are incredibly competent. They are constantly modifying the measures, and part of that is to control excessive household debt.”
He reiterated the reason for suggesting that Korea adopt easy money and extra spending policies is the country is facing “headwinds with risks tilted toward the downside.”
Inflation pressures remain weak, and job creation on the back of sluggish investment and slow global trade has been tepid.
The country's potential growth has also declined due to aging demographics and declining productivity.
It also has a problem concerning rising income inequality and productivity gap between manufacturing and services, as well as between large and small companies.
All these should be addressed and dealt with in the short to medium term, he said.
To this end, the IMF mission team recommended the authorities to adopt and implement an “integrated mix of flexible, stable and active” labor policy to boost social protection, job creation and fiscal soundness.
It calls such a move “flexicurity.”
“Flexicurity should be adopted as a basis for labor market policies by making employment protection legislation more flexible, while further enhancing social safety nets and active labor market policies,” the IMF mission head said.
“Female labor market participation should be promoted, including through improved childcare and child benefits. Rigidities in product market regulations should be addressed by further reducing barriers to entry and the protection of incumbents.”
The team was in Korea from Feb. 27 to March 12 to assess the economy.