High level of household indebtedness remains serious concern, it says


The International Monetary Fund cut its 2012 growth estimate for South Korea to 3 percent on Thursday, down 0.25 percentage point from its June forecast. It also revised its 2013 forecast to 3.9 percent from 4 percent in June.

The IMF said that Asia’s fourth-largest economy is slowing in the face of strong global headwinds, with growth projected to bottom out during the course of 2012, regaining momentum toward the end of the year in line with a global recovery.

“The main short-term risk to the outlook is a further intensification of the euro area crisis and its spillover,” the IMF said in a report to sum up the results of its annual consultations with South Korea’s economic policymakers.

“The external vulnerability of the Korean financial system has diminished considerably since 2008, reflecting higher foreign reserves relative to short-term debt, lower reliance on external funding for the banks, and a reduction in foreign currency maturity mismatches. Despite this progress, potential vulnerabilities remain as Korea has one of the largest and most open capital markets and is exposed to volatile capital flows and foreign currency funding risks,” it said.

Hoe Ee Khor, assistant director of the Asia and Pacific Department at the IMF, told media in Washington on Thursday that the outlook could be downgraded once more when the world economic outlook report is released on Oct. 9 as the IMF is in the process of revising the forecasts for the global economy and for individual countries.

The IMF also emphasized that the monetary policy continues to be accommodative, particularly with the recent cut in the policy rate, but policy normalization will be needed in 2013 if the economy strengthens.

“If the global economy were to deteriorate substantially with knock-on effects on the domestic economy, more support would be warranted from the fiscal side, given ample fiscal space. In this scenario, support would have to go beyond automatic stabilizers and likely involve higher-than-budgeted discretionary spending, similar to what was done effectively in 2009,” the IMF said.

The IMF expects Korea’s export and import growth to increase by 5.6 percent and 4 percent this year, respectively, and by 10 percent and 10.9 percent next year. It also forecasts that the nation’s current account surplus will reach $22.5 billion this year and $21 billion next year. Consumer prices are projected to grow by 2.8 percent this year and by 3.2 percent in 2013.

The high level of household debt and the rising share of lending by non-bank financial institutions remain of serious concern, the IMF said. It also added that the rapidly aging population, growing income inequality and economic polarization are growing challenges for the nation.

By Park Min-young (claire@heraldcorp.com)