Abstract
This 2004 Article IV Consultation highlights that from 1999 to 2002, Korea’s economy grew rapidly, by an average of 7¼ percent per year. But starting in 2003, the economy has begun to sputter. Growth suddenly stopped in the first half of the year, leapt ahead in the second half as exports boomed, but then slowed again to an anemic 2¾ percent annualized rate during January–September 2004 as exports decelerated. The authorities have been countering this slowdown by easing macroeconomic policies. The fiscal policy stance has been shifted from neutral to mildly expansionary.
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 confirms the weakness of domestic demand. Service industry output fell by 1.6 percent (y/y) in November, the fifth consecutive monthly decrease. Meanwhile, consumer confidence slipped to a four-year low in December, as the National Statistical Office’s index fell to 85.1 from 86.6 in November.
3. At the same time, however, there has been some significant progress in restructuring household debt. As of end-2004, the total number of restructurings was estimated to have reached 750,000, compared with 556,000 as of end-September, as reported in the staff report. Consequently, restructurings now account for more than 20 percent of total credit delinquents.
4. The Bank of Korea kept its key interest rate unchanged at 3¼ percent in its mid-January meeting. The Bank said it was waiting to better judge the effects of its latest cuts in August and November 2004, noting also that it continued to expect consumer demand to revive in the second half of 2005.
5. The exchange rate has appreciated by 0.4 percent against the U.S. dollar so far in 2005, bringing the cumulative appreciation since end-2003 to 15½ percent.