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IMF Country Report No. 16/278

REPUBLIC OF KOREA

2016 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF KOREA

August 2016

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 2016 Article IV consultation with the Republic of Korea, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its July 29, 2016 consideration of the staff report that concluded the Article IV consultation with the Republic of Korea.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on July 29, 2016, following discussions that ended on June 8, 2016, 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 July 14, 2016.

  • An Informational Annex prepared by the IMF staff.

  • A Statement by the Executive Director for the Republic of Korea.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623-7430 • Fax: (202) 623-7201

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Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2016 International Monetary Fund

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REPUBLIC OF KOREA

STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION

July 14, 201 6

Key Issues

Background. After decades of impressive economic progress, Korea’s growth has slowed, and the economy is facing a number of structural headwinds, including: unfavorable demographics; heavy export reliance; pockets of corporate vulnerabilities; labor-market distortions; lagging productivity; a limited social safety net; and high household debt. Inequality and poverty are also of concern. On the positive side, Korea has considerable fiscal space to manage these challenges.

Policies for long-term growth and inclusion. Structural reforms in the above areas are critically important. Fiscal policy can be used in a complementary manner, both to incentivize such reforms and to cushion any possible negative effects. In addition, a carefully targeted expansion of social expenditure, sustained over the medium term, could address inequality while bolstering consumption-led growth and even contributing to financial stability. Fiscal rules could be introduced to ensure that additional spending is financed by eventual revenue increases, to preserve sustainability.

Near-term macroeconomic policies. The recently announced fiscal stimulus and monetary easing were appropriate, and the fiscal package should be finalized and implemented as soon as possible. Given the weak conjuncture and downside risks, the macro policy stance should remain supportive. Prudential regulations should be tightened, and better harmonized across financial institutions, to contain risks from household debt. The exchange rate should remain flexible, and the authorities should continue to avoid persistent, one-sided intervention.

Implications for rebalancing. Many of the above policies will not only boost growth but also change its composition—corporate investment will rise, public and private saving will decline, and the large current account surplus will moderate gradually. As the economy rebalances, the economy will become less dependent on volatile external demand, and households will share more in national growth outcomes. Moreover, rebalancing will contribute to global economic resilience, and this too will benefit Korea.

Approved By

Kalpana Kochhar and Martin Kaufman

Discussions were held in Seoul and Busan during May 26–June 8, 2016. The staff team included K. Kochhar (head), K. Mathai, D. Ding, E. Zoli, J. Shin, R. Mano (all APD), and L. Ratnovski (RES). K. Choi and I. Park (OED) participated in the discussions. L. Tolentino, C. Arbelaez, and S. Paroutzoglou (all APD) assisted in preparing this report.

Contents

  • CONTEXT

  • RECENT DEVELOPMENTS AND PROSPECTS

  • A. Recent Developments

  • B. Outlook and Risks

  • POLICY DISCUSSIONS

  • A. Boosting Potential Growth and Fostering Inclusion

  • B. Providing Short-term Support and Addressing Vulnerabilities

  • C. Implications for Rebalancing

  • STAFF APPRAISAL

  • BOXES

  • 1. Korea’s External Position

  • 2. The Authorities’ Plan for Shoring up the Capital of Policy Banks

  • 3. Developing the “Creative Economy”

  • 4. Toward a Rule-Based Fiscal Framework

  • FIGURES

  • 1. Structural Issues

  • 2. The Real Economy

  • 3. Monetary and Financial Sector

  • 4. External Sector

  • TABLES

  • 1. Selected Economic Indicators, 2012–17

  • 2. Medium-Term Projections, 2014–21

  • 3. Balance of Payments, 2012–17

  • 4. Statement of Central Government Operation, 2012–17

  • 5. Financial Soundness Indicators

  • ANNEXES

  • I. Debt Sustainability Analysis

  • II. External Sector Assessment

  • III. Risk Assessment Matrix

  • IV. Main Recommendations from the 2015 Article IV Consultation and Follow Up

  • V. Korea’s Challenges—Parallels with Japan

  • VI. Quantifying the Impact of China’s Rebalancing on Korea’s Income and Trade

  • VII. Corporate Debt: A Firm-Level Investigation

  • VIII. Corporate Restructuring and its Macro Effects

  • IX. Household Debt

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REPUBLIC OF KOREA

STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

July 14, 2016

Prepared By

Asia and Pacific Department

Contents

  • FUND RELATIONS

  • STATISTICAL ISSUES

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Press Release No. 16/377

FOR IMMEDIATE RELEASE

August 12, 2016

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