This 2009 Article IV Consultation highlights that like other open economies, Korea was hard hit by the global financial crisis during the last quarter of 2008. The authorities responded with a timely and comprehensive set of financial market and macrostabilization measures. Executive Directors have commended the authorities for their speedy and comprehensive measures, which have successfully stabilized the economy and the financial system. Directors have also supported the sizable and frontloaded fiscal stimulus package and the intention to maintain fiscal stimulus in 2010 given the uncertain outlook.

Abstract

This 2009 Article IV Consultation highlights that like other open economies, Korea was hard hit by the global financial crisis during the last quarter of 2008. The authorities responded with a timely and comprehensive set of financial market and macrostabilization measures. Executive Directors have commended the authorities for their speedy and comprehensive measures, which have successfully stabilized the economy and the financial system. Directors have also supported the sizable and frontloaded fiscal stimulus package and the intention to maintain fiscal stimulus in 2010 given the uncertain outlook.

Annex I: Korea—Fund Relations

(As of May 31, 2009)

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 SDRs):

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VII. Exchange Rate Arrangement:

Korea’s exchange rate system is classified as “free 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 July 6, 2009, the exchange rate was W 1268.5=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 2008 Article IV consultation were conducted on a mission to Seoul during June 12-24, 2008. The Article IV consultation was concluded by the Executive Board on September 8, 2008. In addition, a staff visit took place during December 4-10, 2008.

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: ttp://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: Technical assistance missions visited Seoul to provide advice on financial holding company supervision and derivatives regulation during December 8-17, 2008, on measures to deepen the money market during December 4-14, 2007, on strengthening the debt management function and further development of the government securities market during September 20-October 2, 2006, on the reform and development of the foreign exchange market during March 30-April 13, 2006, and on macroprudential and derivatives supervision during October 27-November 7, 2005.

STA: Technical assistance missions 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, and during November 28-December 11, 2007 on the GFSM 2001 framework.

XI. Resident Representative:

The resident representative office in Seoul was opened in March 1998 and was closed in September 2008.

Annex II: Korea—Statistical Issues

Data provision is adequate for surveillance. Korea has been a subscriber to the Special Data Dissemination Standard (SDDS) since September 1996. During 2007-08, most SDDS requirements were met. Korea makes use of the timeliness flexibility option for two data categories: the analytical accounts of the banking sector and public sector operations. Recently, central government operations data have been disseminated with delays due to temporary technical capacity constraints. A data ROSC was published in May 2003.

Real Sector Statistics

The overall structure of the national accounts follows the recommendations of the 1993 System of National Accounts. Chain-linked (reference year 2005) and nominal GDP estimates are compiled using the production and expenditure approaches; nominal GDP estimates are also compiled using the income approach. After the revision to reference year 2005, the estimation method for expenditure components has been altered from the commodity flow method to the direct estimation method, in which each expenditure component is measured directly. The size of the informal sector has not been measured.

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

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 2005 revenue shares. The PPI could be improved by making more use of 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.

Government Finance Statistics

Two sets of government finance statistics (GFS) are compiled for the central government, one using national definitions and the other using internationally recognized standards. Concepts and definitions used in the latter generally follow the recommendations of the Manual on Government Finance Statistics 1986. The data cover the budgetary units of the central government and certain extra-budgetary funds owned or managed by budgetary units. These statistics are produced by the Digital Budget and Accounting System (D-Brain), which integrates the preparation of budget data, accounting reports, and the generation of fiscal statistics on a monthly basis. The D-Brain provides for automatic crosschecks at different levels of the compilation process.

Consolidated GFS data on the general government are not provided to the IMF for publication in the Government Finance Statistics Yearbook (GFSY) or the International Financial Statistics (IFS), while the last year for which GFS for the consolidated central government were reported for publication in the GFSY and the IFS is 2005. Certain fiscal data for general government is reported on national websites.

Monetary and Financial Statistics

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 IMF’s Monetary and Financial Statistical Manual. Data relating to foreign assets and foreign liabilities are affected by the Bank of Korea’s (BOK) practice of valuing its financial assets and 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). The authorities have begun reporting monetary data to STA using Standardized Report 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.

Korea participated in the pilot project—Coordinated Compilation Exercise—for Financial Soundness Indicators (FSIs) conducted by the IMF’s Statistics Department. Indicators as of end-2005 were submitted along with metadata, which are now available to the public through the IMF’s website at: http://dsbb.imf.org/Applications/web/fsi/fsicountrycategorylist/?strcode=KOR.

External Sector Statistics

The overall quality of the monthly balance of payments statistics 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. There is also incomplete coverage of transactions via intercompany accounts and noncash transactions. Data on reinvested earnings on direct investment are not compiled, except for the net profits/losses of overseas branches of domestic banks. In the financial account, the direct investment data do not include trade credits or short-term loans with affiliated entities, which are recorded as part of other investment. The BOK is scheduled to develop the classification and sectorization, including the compilation of data on reinvested earnings on direct investment, in the capital and financial account this year

The quality of the quarterly external debt statistics has greatly improved since the financial crisis. In early 2007, the BOK switched from annual to quarterly reporting of the International Investment Position. Data dissemination on international reserves and foreign currency liquidity generally meets the SDDS specifications. Since April 2006, the authorities have disseminated foreign reserves data on a monthly basis rather than twice a month, as had been done since 1997.

Annex II: Korea—Table of Common Indicators Required for Surveillance

(As of July 17, 2009)

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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 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.

Includes external gross financial asset and liability positions vis-a-vis nonresidents.