Republic of Korea: Staff Report for the 2007 Article IV Consultation—Informational Annex

This 2007 Article IV Consultation highlights that the Republic of Korea is enjoying its longest uninterrupted period of economic expansion since the Asian crisis. Growth reached 5 percent in 2006, buoyed by strong exports, and is only expected to slow marginally to 4¾ percent this year. The current account is expected to remain broadly in balance. The impact of the ongoing global financial turbulence has so far been manageable but downside risks to the outlook have increased, with the nascent consumption recovery vulnerable to a downturn in asset markets.

Abstract

This 2007 Article IV Consultation highlights that the Republic of Korea is enjoying its longest uninterrupted period of economic expansion since the Asian crisis. Growth reached 5 percent in 2006, buoyed by strong exports, and is only expected to slow marginally to 4¾ percent this year. The current account is expected to remain broadly in balance. The impact of the ongoing global financial turbulence has so far been manageable but downside risks to the outlook have increased, with the nascent consumption recovery vulnerable to a downturn in asset markets.

Appendix I: Korea—Fund Relations

(As of June 30, 2007)

I. Membership Status: Joined August 26, 1955; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Latest Financial Arrangements:

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VI. Projected Obligations to the Fund (SDR million; based on existing use of resources and present holdings of SDR’s):

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VI. Exchange Rate Arrangement:

Korea’s exchange rate system is classified as “independently floating.” Previously, the exchange rate against the U.S. dollar was allowed to float only within specified margins around the previous day’s weighted average exchange rate in the interbank market. The margins were widened five times between March 1990 and November 1997 (most recently to +/-10 percent), and on December 16, 1997 were eliminated altogether. On August 14, 2007, the exchange rate was W 932=US$1. Korea maintains exchange restrictions for security reasons, in accordance with UN Security Council Resolutions, which have been notified to the Fund under the procedures set forth in Executive Board Decision 144-(52/51).

VIII. Last Article IV Consultation:

Korea is on a 12-month consultation cycle. Staff discussions for the 2006 Article IV consultation were conducted on a mission to Seoul during May 25-June 8, 2006. The Article IV consultation was concluded by the Executive Board on September 29, 2006. In addition, a staff visit took place during November 2–10, 2006.

IX. FSAP and ROSC Participation:

MCM: The final FSAP mission was conducted during October 2002. The mission completed the FSAP by assessing the short-term vulnerability of the financial sector to macroeconomic and sectoral shocks and analyzing overall financial sector soundness and developmental challenges, including issues arising from the draft standards assessments. A follow-up technical assistance mission on the supervision of derivatives markets was held in Seoul during January 9–20, 2003. The Financial System Stability Assessment report has been published (country report No. 03/81) and is available on the web through the following link: http://www.imf.org/external/np/fsap/fsap.asp

FAD: Discussions on fiscal transparency were held in Seoul during June 2000, and a report was drafted and finalized in November 2000, with input from APD staff. The report has been published and is available on the web through the following link: http://www.imf.org/external/np/rosc/kor/fiscal.htm

STA: Discussions on Korea’s data dissemination practices against the IMF’s Special Data Dissemination Standard (SDDS) were held in Seoul during April 2001, and a report was drafted and finalized on November 28, 2001. The report has been published and is available on the web through the link: http://www.imf.org/external/pubs/ft/scr/2003/cr03127.pdf

X. Technical Assistance:

FAD: A technical assistance mission visited Seoul during January 8–19, 2001 to evaluate current practices in budgeting and public expenditure management and to provide advice on setting up a medium-term fiscal framework. A mission visited Seoul during August 31-September 16, 2005 to provide technical assistance on the reform of tax policy and administration.

MCM: A mission conducted a high-level technical seminar during May 16–22, 2000 on the development of the foreign exchange market. The seminar covered issues in supervision, market monitoring, derivatives instruments, and market microstructure. Technical assistance missions visited Seoul to provide advice on macroprudential and derivatives supervision during October 27-November 7, 2005, on the reform and development of the foreign exchange market during March 30-April 13, 2006, and on strengthening the debt management function and further development of the government securities market during September 20-October 2, 2006.

STA: A technical assistance mission visited Seoul during March 29-April 12, 2000 to provide advice on balance of payments and external debt statistics, with a view toward improving the recording of financial derivatives and developing an international investment position statement.

XI. Resident Representative:

The resident representative office in Seoul was opened in March 1998. Ms. Meral Karasulu has been the Resident Representative since September 2006.

Appendix II: Korea—Statistical Issues

The statistical base is adequate to conduct effective surveillance. Korea has been a subscriber to the Special Data Dissemination Standard (SDDS) since September 1996. During 2006 there were occasional dissemination delays for some data categories, particularly for central government operations.

Real Sector

The overall structure of the national accounts follows the 1993 System of National Accounts; the transition from the 1968 SNA was completed in March 2004. Constant (base year 2000) and current price estimates of GDP are produced using the production and expenditure approaches, and current price accounts using the income approach. While the size of the informal sector has not been measured, informal activities (including some illicit activities) are expected to be reflected in the next revision of the national accounts. The commodity flow technique could be improved by moving to the Supply and Use Table framework, but there have been difficulties in obtaining required basic data.

The Consumer Price Index (CPI) covers 38 urban areas (about 80 per cent of the urban population) and is defined to exclude farm and fishing households. The CPI could be further improved by extending its coverage to rural areas. The basket is updated every five years and its weights are derived from the 2005 Family Income and Expenditure Survey. The geometric mean of price changes would be a suitable alternative to the ratio of arithmetic means of prices.

The scope of the Producer Price Index (PPI) covers all domestic industrial activities and a large segment of service activity, as well as free trade zones and bonded warehouses. The weights are based on 2000 revenue shares. The PPI could be improved by imputing missing prices using the prices of similar commodities, rather than carrying forward the last reported price. A geometric mean of price relatives should be used rather than an arithmetic mean.

Fiscal Sector

Two sets of government finance statistics (GFS) are compiled for the central government, using national definitions and using internationally recognized standards. Concepts and definitions used in the latter generally follow the recommendations of the Manual on Government Finance Statistics 1986 (GFSM 1986). The data cover the budgetary units of the central government (including social security funds owned and/or managed by the government) and the extra-budgetary funds owned or managed by these units. These statistics are produced from the National Financial Information System (NAFIS), which integrates the preparation of budget data, accounting reports, and the generation of fiscal statistics on a monthly basis. The NAFIS provides for automatic crosschecks at different levels of the compilation process.

Consolidated data on the general government consistent with international standards are not compiled, with the central government accounting for about 75 percent of general government operations. The last year for which GFS were reported for publication in the GFS Yearbook was 2005.

Monetary Sector

Following the recommendations of the 2001 data ROSC mission, revised monetary aggregates have been compiled since early 2002. These aggregates almost fully comply with the Monetary and Financial Statistical Manual (MFSM 2000). Data relating to foreign assets and foreign liabilities are affected by the BOK’s practices of valuing its financial assets and financial liabilities at book value (rather than at market value) and revaluing its foreign currency denominated assets and liabilities twice yearly (rather than on a monthly basis). Also, some banks are using nationality rather than residency to distinguish between resident and nonresident individual and household accounts, affecting the accurate measurement of net foreign assets of the banking sector. The authorities have begun reporting monetary data to STA using the new Standardized Reporting Forms, but the data show discrepancies from those reported using the old forms. The authorities have been informed of the problem, and resolution is pending.

External Sector

The overall quality of the monthly balance of payments data is good. The BOK implemented the fifth edition of the IMF’s Balance of Payments Manual (BPM5) in early 1998, but some deviations remain in the classification and sectorization of certain transactions. Following liberalization, the coverage of the balance of payments statistics has become less comprehensive, as residents were permitted to conduct transactions via accounts with banks abroad. There is also incomplete coverage of transactions via intercompany accounts, and non-cash transactions. The BOK has developed an array of statistical techniques and collection systems to improve the coverage, classification, and timeliness of source data, especially in services transactions.

The quality of quarterly external debt statistics has greatly improved since the financial crisis. Since September 2003, the statistics have been compiled on a residency basis according to the Debt Guide (IMF). In early 2007, the BOK switched from annual to quarterly reporting of the International Investment Position (IIP), with quarterly data reported for 2001–06.

Data dissemination on international reserves and foreign currency liquidity generally meets the SDDS specifications for periodicity, timeliness, and advance release calendar. In late April 2006, the authorities decided to disseminate foreign reserves on a monthly basis rather than twice a month, as had been done since 1997.

Korea: Table of Common Indicators Required for Surveillance

(As of July 30, 2007)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

Reflects the assessment provided in the data ROSC or the Substantive Update (published on May 15, 2003, and based on the findings of the mission that took place during April 11–25, 2001) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

Same as footnote 7, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, and revision studies.