Abstract
Korea has made a spectacular recovery from the Asian crisis. Executive Directors commended this developments, and stressed the need to implement monetary and fiscal polices. They commended the structural reforms, and emphasized the need to strengthen the asset management sector. They welcomed the approval of a free trade agreement with Chile, and looked forward to further trade-opening steps in the agricultural sector. They welcome the three-year roadmap for corporate reform, which eases regulations on 'chaebol' that improve governance.
1. This statement provides additional information that has become available since the circulation of the staff report. The information does not change the thrust of the staff appraisal.
2. Recent data reinforces the macroeconomic assessment in the staff report.
Surging exports are continuing to drive economic activity. Merchandise exports rose 33 percent (y/y) in January 2003, fueling a rapid growth in industrial production, which increased 10½ percent (y/y) in December.
However, domestic demand remains sluggish. Wholesale and retail sales declined 2½ percent (q/q, s.a.) in the fourth quarter, similar to the declines in the two preceding quarters.
Inflation remains subdued. In January, the core CPI rose by 2.8 percent (y/y), while housing prices fell slightly, reducing the year-on-year increase to 5½ percent.
3. Capital inflows accelerated in early 2004, propelled by a global shift of portfolio investment into Asia. Foreign investment in Korean equities amounted to $4½ billion in the first six weeks of 2004, helping to increase reserves by around $7 billion to $162.6 billion on February 13, 2004. Despite the reserve increase, the Korean won appreciated over this period by 3 percent against the U.S. dollar and 2½ percent in nominal effective terms.1
4. The National Assembly ratified Korea’s first free trade agreement (FTA). After intensive government lobbying, the FTA with Chile, which had been signed in October 2002, was ratified on February 17, 2004.
5. Former Finance Minister Lee Hun-Jai was appointed as Deputy Prime Minister and Minister of Finance and Economy on February 10, 2004. He replaced Mr. Kim Jin-Pyo, who resigned to run in the April 15 parliamentary elections. No significant change in economic policy direction is expected.
The authorities have also announced that they will ease their recently introduced restrictions limiting the size of positions that domestic financial institutions can take in the nondeliverable forward (NDF) market.