Front Matter Page
© 2003 International Monetary Fund
March 2003
IMF Country Report No. 03/79
Republic of Korea: 2002 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Korea
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the Article IV consultation with the Republic of Korea, the following documents have been released and are included in this package:
the staff report for the 2002 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on October 29, 2002, with the officials of the Republic of Korea on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on February 7, 2003. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff statement of March 3, 2003 updating information on recent developments.
a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its March 3, 2003 discussion of the staff report that concluded the Article IV consultation.
a statement by the Executive Director for the Republic of Korea.
The document(s) listed below have been or will be separately released.
Selected Issues Paper
Financial System Stability Assessment
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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International Monetary Fund
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Front Matter Page
INTERNATIONAL MONETARY FUND
REPUBLIC OF KOREA
Staff Report for the 2002 Article IV Consultation
Prepared by Staff Representatives for the 2002 Consultation with the Republic of Korea
Approved by Wanda Tseng and Michael Hadjimichael
February 7, 2003
The consultation discussions were held in Seoul during October 16–29, 2002. The mission team comprised Messrs. Coe (head), Beaumont, He, and Zebregs (all APD), and was assisted by Mr. Gruenwald, Resident Representative. Mr. Callaghan, Executive Director, and Mr. Cho Won-Dong, Advisor to the Executive Director, participated in the discussions.
The mission team met with Deputy Prime Minister and Minister of Finance and Economy, Jeon Yun-Churl; Bank of Korea Governor, Park Seung; Financial Supervisory Commission Chairman, Lee Keun-Young; other senior government, central bank, and supervisory officials; and representatives from research institutes, universities, domestic and foreign financial institutions, the federation of industry, labor unions, and the diplomatic community.
As part of the Article IV consultation, the draft report of the Financial Sector Assessment Program was presented to the authorities by a team headed by Mr. Baliño (MAE) at the conclusion of the October 2–18 FSAP mission. A follow-up technical assistance mission was held in Seoul during January 9–20, 2003, headed by Ms. Guide-Wolf (MAE).
Korea’s statistical base is adequate to conduct effective surveillance.
Korea has accepted the obligations under Article VIII of the Articles of Agreement, and maintains an exchange system free of restrictions on payments and transfers for current international transactions.
The staff report was prepared by Messrs. Coe, Beaumont, He, and Zebregs, with a contribution from Mr. Laryea (LEG).
Contents
Glossary of Abbreviations and Terms
Executive Summary
I. Introduction
II. The Current Setting and Prospects
A. Macroeconomic and Market Developments
B. Monetary and Fiscal Policies
C. Financial and Corporate Sector Developments
D. Outlook and Assessment of Risks
III. Policy Discussions
A. Macroeconomic Policies
B. Financial and Corporate Sector Policies
C. Other Issues
IV. Staff Appraisal
Boxes
1. Developments in Household Credit
2. Reprivatization of Financial Institutions
3. Recovery of Public Funds for Financial Sector Restructuring
4. Corporate Insolvency Law Reforms
5. The DPRK: Recent Developments in Economic Policies
6. Financial System Stability Assessment: Findings and Recommendations
Tables
1. Macroeconomic Framework, 1998–2003
2. Balance of Payments, 1998–2003
3. Consolidated Central Government Operations, 2000–03
4. Monetary and Financial Indicators, 2000–02
5. Medium-Term Projections, 2000–07
6. Indicators of External Vulnerability, 1998–2003
Figures
1. Activity and Prices
2. External Developments
3. Financial Market Indicators
4. Corporate and Financial Sector Soundness
5. Housing Price Developments, 1986–2002
Annexes
I. Statistical Issues
II. Fund Relations
Glossary of Abbreviations and Terms
| BOK |
Bank of Korea |
| CEO |
Chief Executive Officer |
| CFO |
Chief Financial Officer |
| DPRK |
Democratic People’s Republic of Korea |
| EMBI |
Emerging Markets Bond Index |
| FATF |
Financial Action Task Force |
| FSAP |
Financial Sector Assessment Program |
| FSC |
Financial Supervisory Commission |
| FSS |
Financial Supervisory Service |
| FTA |
Free Trade Agreement |
| FTC |
Fair Trade Commission |
| ICR |
Interest Coverage Ratio |
| IT |
Information Technology |
| ITMCs |
Investment Trust Management Companies |
| IPO |
Initial Public Offering |
| KAMCO |
Korean Asset Management Company |
| KCGF |
Korean Credit Guarantee Fund |
| KDIC |
Korean Deposit Insurance Company |
| KOSDAQ |
Korean Security Dealers Association Index |
| KOSPI |
Korea Stock Price Index |
| MDP |
Millennium Democratic Party |
| MOFE |
Ministry of Finance and Economy |
| MOJ |
Ministry of Justice |
| MPB |
Ministry of Planning and Budget |
| MSB |
Monetary Sterilization Bonds |
| MSCI |
Morgan Stanley Capital International |
| NBFI |
Nonbank Financial Institutions |
| NPF |
National Pension Fund |
| NPL |
Nonperforming Loans |
| q/q |
Quarter-on-quarter |
| p.a |
Period average |
| PCBO |
Primary Collateralized Bond Obligation |
| s.a |
Seasonally adjusted |
| SDDS |
Special Data Dissemination Standard |
| SFC |
Securities and Futures Commission |
| SSF |
Social Security Funds |
| W |
Won |
| y/y |
Year-on-year |
Exchange rate at end-December 2002 US$1 = W 1,196.9
Executive Summary
Current setting and outlook. Korean economic growth recovered in 2002 led by strong domestic demand. Banking system health further improved but problems in some NBFIs remain to be resolved. While overall corporate sector performance strengthened substantially, the performance of financially weak enterprises deteriorated.
Growth rose to about 6 percent in 2002 from 3 percent in 2001. Buoyant consumption and residential construction spending underpinned the recovery beginning in late 2001. In 2002 exports rebounded strongly despite a weaker-than-expected recovery in the global economy. The current account surplus declined slightly in 2002 and the won appreciated against the U.S. dollar, largely moving in tandem with the yen. Core CPI inflation remained at the center of the target range.
The fiscal surplus was substantially higher than budgeted, resulting in a contractionary fiscal stance in 2002, and some further fiscal contraction appears likely in 2003. This is broadly offset by the moderately accommodative stance of monetary policy, which has been on hold since a 25 basis point rate hike in May 2002.
Banks further reduced their NPLs in 2002, and bank privatization advanced notably. Progress in restructuring NBFIs, on the other hand, was relatively slow. While overall debt-equity ratios fell in 2002, corporate debt remains high compared with industrial countries and the operating profits of financially weak companies declined.
Economic growth is expected to moderate to about 5½ percent in 2003 as increases in domestic demand slow. Inflation is projected to rise slightly, and a further decline in the current account surplus is expected. There are significant downside risks to the near-term outlook related to external demand and oil prices, and potentially to developments in the DPRK.
Policy issues. There was broad agreement on the outlook and risks, with discussions centering on the appropriate response if the downside risks materialize.
If growth falters substantially, fiscal policy should play the main role in supporting demand given that monetary policy is already moderately expansionary. While the automatic stabilizers will provide some initial support to demand, fast-acting fiscal measures such as bringing forward projects already in the budget, income tax rebates, and reductions in petroleum taxes in case of a sharp rise in oil prices should be considered.
Once external uncertainties are resolved, it would be appropriate for monetary policy to resume the process of moving to a more neutral stance.
The authorities should take the opportunity to strengthen fiscal transparency and budget management, especially to avoid systematic expenditure shortfalls that result in a procyclical fiscal stance in an economic slowdown.
Continued efforts will be needed to consolidate progress in financial and corporate sector restructuring, including by resolving weak NBFIs, utilizing the expected new corporate insolvency procedures to restructure the remaining financially weak companies, and further strengthening corporate governance.
Front Matter Page
March 3, 2003
Front Matter Page
Public Information Notice (PIN) No. 03/26
FOR IMMEDIATE RELEASE
March 06, 2003
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
Front Matter Page
March 3, 2003
Key Points
Sweeping economic and structural reforms over the past five years have resulted in Korea recovering from crisis to become one of the fastest growing economies in the world.
The new administration of President Roh, Moo-Hyun is committed to ensuring there is no complacency in the ongoing reform effort.
The authorities are well placed to respond to any downside risks to the outlook for the Korean economy posed by an uncertain global environment.
The restructuring of the financial sector is continuing and, while consumer credit has been expanding significantly, it does not pose a threat to the financial system. The authorities are mindful of problems in the insurance sector and pension reform remains a high priority for the new administration.
Improvements in corporate governance have been significant and are being reflected in stock prices.
Korea is confident that the dividend from the sweeping changes to the economy that are underway will not only see it maintain its high potential growth rate, but increase it.
