Context: Cyclical Recovery Amid Long-Term Challenges

1. Korea’s near-term outlook is improving. After slowing down in the second part of 2016, growth picked up in 2017, supported especially by buoyant investment, while recent geopolitical tensions have had a limited impact. The output gap, nonetheless, remains negative. Headline inflation has risen to around the 2 percent target, with some volatility. Fiscal policy is tight while monetary policy remains accommodative even as the BOK initiated the monetary tightening cycle with a 25-basis point policy rate hike in November. High and rising household debt represents a short-term vulnerability.

2. External imbalances persist. With real exports exceeding 50 percent of real GDP—one of the highest shares among advanced economies—and increasing precautionary savings weighing on consumption, the current account balance was 7 percent of GDP in 2016, and is projected to remain above 5 percent in the medium term.

3. Structural headwinds hinder a pick-up in long-term growth. Potential growth has fallen from 7 percent in the early 1990s to below 3 percent, in line with the authorities’ views, on account of adverse demographics and slowing productivity, and is projected to decline steadily until 2058.¹ Korea’s share of population that is working age is expected to peak at 70 percent in 2016 and drop to 50 percent in 2050, depressing potential employment and growth. Total factor productivity has slowed down and remains about 60 percent of that in the US.

4. Labor and product markets are highly dualistic. In the labor market, there is significant divide between regular and non-regular workers. The latter represent a share of over 20 percent in Korea, compared to an average 11 percent in OECD economies. Non-regular workers often get stuck in succeeding spells of short-term employment, earn on average 66.3 percent of regular workers’ wages, and are less likely to receive social benefits or on-the-job training, which has contributed to inequality and lower productivity growth.² Labor market segmentation is also aggravated by the divide between large and small firms, with the latter—less productive— paying lower wages and offering fewer regular job positions. In the product market, there are also large productivity gaps between manufacturing and services. Staff analysis indicates that labor productivity in manufacturing was 65 percent relative to the frontier in 2012, compared to 31 percent in market services.

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Wage gaps between regular and non-regular workers - 2016

(Percent)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

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Social Insurance Coverage - 2015

(Percent)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

Source: Ministry of Employment and Labor (MOEL).

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5. Polarization and inequality are worsening. Old-age poverty is significantly higher than in the rest of the OECD, and the rate of unemployed and inactive youth is high.³ While Korea’s Gini coefficient is below the OECD average, it inched up in 2016, to 0.304 compared to 0.295 in 2015, the highest figure since 2012. Furthermore, income polarization has been worsening, with the ratio of disposable income of the highest quintile to the lowest quintile increasing from 5.1 in 2015 to 5.5 in 2016. Moreover, social mobility through education and entrepreneurship has weakened substantially. An inadequate safety net and duality in labor markets, and between SMEs and large companies, are key contributors to inequality.

6. The new government has started implementing a comprehensive economic program to address low growth and worsening income inequality. The program—characterized by the authorities as “a paradigm shift”— focuses on income-led growth, job creation, fair competition, and innovation. The government has already taken important initiatives (Box 1). President Moon won this year elections decisively and continues to enjoy high approval ratings, but his party lacks the three - fifths majority required to pass legislation unilaterally.

Recent Economic Developments, Outlook and Risks

A. Recent Developments

7. The economy is showing momentum. Growth has picked up this year, led by a strong expansion in investment, especially in the IT sector. Construction growth remained robust as mortgage loans continued to expand at a solid pace. Export growth strengthened thanks to improving external conditions and high global demand for semiconductors. The contribution of net exports to growth was negative, however, owing to an import surge driven by investment. Private consumption growth has also picked up, but remains below economic growth. The recovery has been supported by an accommodative monetary policy, with lending rates and long-term yields close to record lows. The unemployment rate is hovering around 3.8 percent (seasonally adjusted), but remains significantly higher for youth, at 10.0 percent (seasonally adjusted) in September.

Box 1.

Policy Initiatives of the New Government

The government is implementing or about to implement important policy measures to support income and social protection, that have already been approved by parliament or the counterparts involved. They include

1. a 2017 Supplementary budget of KRW of 11 trillion (0.7 percent of GDP), which includes subsidies for job-seeking youth, higher child and unemployment benefits, transfers to the elderly and tax incentives to firms for hiring;

2. a 16.4 percent increase in the minimum wage beginning in 2018;

3. a permanent expansion in welfare spending in the 2018 budget;

4. a tax revision bill which envisages measures to make the tax system more progressive, including: (a) a hike in the income tax rate for the top two brackets by 2 percentage points; (b) an increase in the corporate tax rate for companies whose taxable income exceeds KRW 300 billion ($276 million) from 22 percent to 25 percent.

In addition, the government is working on other initiatives that will be finalized in the coming months:

• A five-year employment road map, which envisages an expansion in public sector jobs, new restrictions on the use of non-regular employment contracts, enhancements in the wage system, and a 52-hour limit on weekly working hours.

• Measures to promote fair competition between conglomerates and smaller firms.

• A plan to support innovation and foster productivity growth. This involves upgrading technology and providing an environment that promotes creative research. To foster private-sector-driven growth, the government intends to implement far-reaching regulatory reforms.

8. Headline inflation temporarily rose above the Bank of Korea’s two-percent target during 2017. This largely reflects a surge in commodity prices. In November, headline inflation slowed to 1.3 percent year-on-year, as agricultural, utilities and tourism prices fell, which more than offset higher gasoline prices. Core inflation, which excludes food and energy prices, remained below two percent, and stood at 1.4 percent in November, reflecting the negative output gap.

9. Capital flows proved resilient to monetary tightening in the US and increased geopolitical tensions. Compared to the first three quarters of last year, net non-FDI capital inflows increased by $10 billion. Non-resident portfolio inflows surged US$16.6 billion as foreigners sharply expanded purchases of debt securities. Equity inflows have also been strong, with the share of foreign ownership in the domestic stock market rising to more than 34 percent in September, and contributing to an all-time high in stock prices.

10. The real effective exchange rate (REER) has been on a gradually appreciating trend since 2013. The average REER from January to November 2017 was 2.7 percent above the 2016 average. The nominal effective exchange rate appreciated by 2.4 percent over this period. This was driven largely by an appreciation of the won against the dollar by 11.7 percent in 2017. Foreign exchange reserves increased by 3.6 percent year-to-date, mostly owing to valuation effects, reaching US$384 billion (25 percent of GDP) in October. Foreign exchange intervention appears limited based on staff estimates with available data.

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Korea - REER

(Index, 2010=100)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

Sources: APDCORE Database.

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Estimated FX Spot and Forward Intervention

(USD Bil., += USD purchases, spot and long forward)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

Sources: CEIC, Haver, IMF. Staff calculations.Note: These estimations do not correct for issuance of FX stabilization bonds due to lack of data.

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11. The current account surplus narrowed but remained elevated. In the first three quarters of 2017, it was 5.7 percent of GDP (seasonally adjusted), compared to 7 percent of GDP in 2016. The decline was driven by (i) a surge in imports of capital goods, which more than compensated for a rise in exports; (ii) a narrower service balance, reflecting a decline in shipping services and the lower tourism arrivals from China, (iii) a smaller income balance, and (iv) rising commodity prices. The surplus for the whole year is projected at 5.6 percent of GDP. The narrowing of the current account surplus reflects a rise in the investment to-GDP-ratio by 2 percentage points, with the saving rate increasing only marginally.

12. A preliminary assessment of Korea’s 2017 current account surplus finds it to be “stronger than warranted by medium-term fundamentals and desirable policies.” A significant part of Korea’s current account surplus reflects fundamentals and cyclical factors (such as demographic factors and the oil price), which the IMF’s assessment separates out in order to arrive at an estimate of the “current account gap.” Compared with the assessment of the 2016 external position,⁴ preliminary model estimates for 2017 point to a narrower current account gap. About two-thirds of the gap is attributed to a “policy gap,” primarily a tighter-than-warranted fiscal stance and social spending being below the desirable level, with the remainder of the gap reflecting other factors (residual in the model estimates). The rapid integration of Korea into global value chains could be another explanatory variable.⁵ Correspondingly, the REER is assessed to be weaker than the level consistent with fundamentals and desirable policies (Annex I).

13. The financial sector is sound, with high and rising household debt the main domestic financial stability risk. Household debt exceeds 90 percent of GDP, increasing vulnerability to both a housing price correction and a sharp rise in interest rates.⁶ A tightening of macroprudential measures has helped slow household credit growth to 7.8 percent year-on-year in October, from the 12-percent average annual growth rate in 2016. The increase in house prices nationally has slowed to about 1 percent year-over-year; but in Seoul apartment prices are still rising at a nearly 5-percent annual rate. Macroprudential policy measures, including some targeting speculative buying of apartments in Seoul, should help stabilize prices. According to staff analysis, the overall housing prices level is in line with fundamentals. However, there remains a risk of a price correction in the region around Seoul, which experienced larger price increase and where the surge in supply from the construction boom could weigh on prices.

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Housing Price Inflation: Apartments and Jeonse Rent Index

(year-on-year growth, percent)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

Sources: CEIC; IMF staff calculations.

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14. The macro policy mix relies excessively on monetary policy, with no contribution from fiscal policy. The fiscal stance has been tight, while monetary policy is accommodative, hindering the necessary external adjustment. Even though the policy interest rate was raised 25 basis points in November 2017 to 1.5 percent, policy remains accommodative and will continue to be so even after the further rate hikes expected by financial markets in 2018. In contrast, fiscal impulse was negative in 2016, with the structural budget surplus increasing by 1.2 percent of GDP (consolidating central government and social security fund accounts). While the fiscal impulse could be positive in 2017, as the new government increases spending, the structural fiscal surplus will likely remain sizable, at 1.4 percent of GDP this year, providing limited support to the recovery.

15. The corporate sector as a whole is profitable and moderately leveraged, but with significant differences across groups of firms. The aggregate debt-to-equity ratio was 79.6 percent at the end of 2016— just 1 percentage point up from the previous year. Profitability and the interest coverage ratio improved. However, there are large differences in financial performance across groups of firms. Liquidity and profitability are weaker for SMEs than for large firms. Moreover, profitability, solvency, liquidity and leverage positions are poorer among the conglomerates excluding the largest four compared to the top four conglomerates and other large companies. This could ultimately have an adverse impact on investment and growth.⁷

16. Corporate restructuring is progressing. Debt-to-equity ratios in the shipbuilding and shipping industries, which are undergoing restructuring, fell dramatically in 2016 (by 155 and 147 percentage points, respectively, compared to 2015), owing to debt restructuring and capital injections. Further recapitalization occurred in 2017. In 2016-17 the state-owned policy banks EXIM and KDB, which are the main creditors of the shipbuilding and shipping firms under restructuring have increased their capital by KRW 2.2 trillion and KRW 3 trillion, respectively, including through capital injections from the government and issuance of subordinated debt. The Policy Bank Recapitalization Fund that was set up last year, and partly financed by a BOK loan, has not been tapped yet.

Supporting the Recovery and Mitigating Risks

24. The baseline policy mix in 2018 is a tight fiscal and an accommodative monetary stance. The structural fiscal balance is projected to increase to 1.5 percent of GDP, based on the 2018 budget passed by the National Assembly. While monetary policy has started the normalization process with a rate hike in end-November, the stance will remain accommodative in 2018.

25. Fiscal policy needs to become significantly more expansionary to support inclusive growth and reduce excessive external imbalances. Staff recommends that the government reduces the structural balance toward zero by at least 0.5 percentage point each year during the coming years. This should be achieved largely through higher expenditures on social policies and structural reforms, including targeted transfers to the most vulnerable, and increased spending on childcare and Active Labor Market Policies (ALMP). This would increase growth by nearly 0.2 percentage point each year. The expansion should preferably be even more frontloaded, provided it does not significantly hinder the efficiency of public expenditures. This policy would boost a consumption-led recovery, promote economic rebalancing and, critically, help lift potential output (see paragraphs 41–42 and Box 3). Should the output gap close earlier than anticipated and inflationary pressures emerge, monetary policy should be tightened faster, while allowing fiscal policy to continue supporting long-term growth and rebalancing. This will also contribute to a recalibration of the policy mix to avoid over-reliance on monetary policy. Korea has substantial fiscal space to aim for a zero-structural balance in the short and medium run without a risk to debt sustainability. This would prevent Korea from running a procyclical fiscal policy. It would also allow to continue maintaining a fairly stable debt-to-GDP ratio, with the pension fund accumulating some additional assets.

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Korea - Actual and Expected Inflation

(Percent)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

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26. The BOK should maintain its accommodative monetary stance. The policy rate was increased by 25 basis points on November 30. The authorities indicated that the BOK will take a measured approach to adjusting the accommodative stance, while cautioning that maintaining the current interest rate of 1.25 percent could have intensified risks from accumulated financial imbalances. This represents the first step toward normalization of monetary conditions, with at least one more rate hike expected by financial markets in 2018. Policy will remain accommodative next year and, given that inflationary pressures are likely to remain subdued, further monetary tightening can wait for clear indications that projected inflation would move above the BOK’s target. Early and decisive action to ease the fiscal stance along the line outlined above would facilitate a more rapid rebalancing of the policy mix.

27. The credibility of the revised inflation target should continue to strengthen. Inflation expectations became less well anchored as actual inflation moved below the target range for headline inflation of 2½-3½ percent in 2013-16 (Figure). As part of its regular, triennial review of the monetary policy framework, the BOK shifted to a point target of 2 percent in 2016. This is the same level as in most advanced economies, and reflects the BOK’s reassessment of the optimal inflation target, which has declined owing to structural changes in the inflation process stemming from factors such as rapid population aging. Until this reduction, the midpoint of the target range had not been changed. With inflation now close to the revised target, the credibility of the anchor should strengthen over time provided no more changes to the target are made. There may be scope to accelerate this process through communications clarifying how policy will achieve this target.

28. While BOK communication is already effective, more specific characterization of policy rate intentions can enhance monetary policy credibility. Transparency on monetary policy decision making is high with, for example, MPC members’ views on economic conditions and how policy should respond published and summarized in a statement by the Governor. Communication could be further enhanced through more forward-looking discussion of how the inflation target is to be achieved. This involves characterizing the central bank “policy reaction function” by explaining how the BOK proposes to adjust policy rates in the future as circumstances change. This approach of inflation-forecast targeting (IFT) is practiced by central banks in a variety of ways reflecting the different situation in each country. BOK communication already includes elements of IFT, which can be built upon. IFT involves more systematic communication of how the policy rate is likely to be adjusted to align forecasted inflation with the inflation target.⁸ This does not mean providing a numerical path for the policy rate; but, rather, a discussion of how the central bank is likely to respond to shocks impacting the inflation forecast. Evidence from the experience of central banks practicing IFT suggests that it strengthens the nominal anchor provided by the inflation target (Box 2).

29. In the context of the strong commitment to exchange rate flexibility, policymakers should clarify their foreign exchange intervention policy. This policy is to respond to “excessive volatility,” resulting from disorderly market conditions (DMCs). The clarification could address how excess volatility is triggered by DMCs, which typically results from some form of market dysfunction or illiquidity (e.g. a buildup of very large speculative positions).

30. Regulatory reforms are strengthening the resilience of the financial system. Banks’ capital ratios are well above regulatory minimums at 14.8 percent in 2016. A Basel III capital surcharge on five domestic systemically important banks and a counter-cyclical capital buffer (CCB) were put in place in 2016 and will be phased-in gradually. The surcharge will rise to one percent in 2019. The CCB has not been activated yet. Its maximum size is of 2½ percent of RWA, however, it is likely to remain low, owing to the slowdown in credit growth. Banking system liquidity is improving, with the loan-to-deposit ratio at 119 percent and expected to edge lower with the moderation in loan growth. Bank asset quality is good, with a non-performing loan ratio of 1.25 percent. Indicators of financial soundness for non-bank financial institutions’ (NBFIs) are also strong, although NPL ratios tend to be higher than for banks, reflecting the generally lower quality of borrowers. Part of the increase in capital ratios in 2016 was due to lower risk weights as low interest rates contributed to an improvement in borrowers’ credit ratings, which can reverse as future interest rates increases push up risk weights. The supervisory authorities are tightening and harmonizing regulation across different types of financial institutions that should help contain further migration of credit risk from banks to NBFIs.

Box 2.

Central Bank Experiences with Inflation-Forecast Targeting

Inflation-forecast targeting (IFT) can strengthen the monetary policy framework. The framework varies across countries and encompasses a wide range of communication strategies: from a more qualitative description of the path for policy rates to publication of a numerical path of the interest rate (e.g. Sweden, the Czech Republic, New Zealand, Norway, Israel, and South Africa). It can enhance credibility by communicating the central bank “reaction function” that needs to be well explained so it is not misinterpreted as a commitment to a policy rate path.

Country experiences suggest that IFT has provided a more resilient nominal anchor. Inflation expectations remain much more firmly anchored to the inflation target during significant deviations of inflation from target. In the Figure, the horizontal axis plots the deviation of inflation expectation from target over the years 2015-17, and the vertical axes plots the associated expected inflation rate three years ahead. The five IFT countries are shown as green squares for each quarterly observation, and are mostly centered around the horizontal axis, whereas non-IFT countries, shown as blue squares for the Euro Area, and Japan, shown as red dots, are persistently below the horizontal axis. In almost all cases, the current inflation is below target owing to the fall in energy prices and significant negative output gaps. In the non-IFT group, three-year ahead inflation expectations are negative, implying that the current deviation from target is expected to persist for the next three years. In contrast, this deviation for the IFT group is near zero. This indicates that for non-IFT economies, negative inflation shocks tend to be associated with a shift in medium-term inflation expectations downward, while in IFT economies they remain well anchored to the target.

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Deviation of Consensus Headline Inflation Forecasts from Target

(percentage point)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

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31. Rising interest rates could pose a risk to asset quality. Low interest rates have contributed to low NPLs by making repayment easier, and asset quality could deteriorate with a large hike in interest rates. Stress tests of interest rate increases are essential to assess asset quality and credit risk. The supervisory authorities conduct a range of bottom-up and top-down stress tests for banks at an annual or quarterly frequency. They show that even a large interest rate increase of 300 basis points has a manageable impact on bank asset quality (Text Table). Top down stress testing, involving common macroeconomic risk scenarios for the financial system, will be extended to NBFIs next year. Bottom-up stress tests are already being applied to individual NBFIs and generally show a high level of resilience.

Results of Interest Rate Stress Tests of Bank Capital Adequacy

Source: Financial Stability Repart “Stress Tests of Banking Sector under Interest Rate Hike Scenarios,” Box 6, June 2017, Bank of Korea.

Results of Interest Rate Stress Tests of Bank Capital Adequacy

Size of Interest Rate Shock	Basel Capital Ratio after Shock	Impact of Shock on Basel Capital Ratio
+100bp	14.9	−0.2
+200bp	14 4	−0.7
+300bp	13.7	−1.4

Source: Financial Stability Repart “Stress Tests of Banking Sector under Interest Rate Hike Scenarios,” Box 6, June 2017, Bank of Korea.

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Results of Interest Rate Stress Tests of Bank Capital Adequacy

Size of Interest Rate Shock	Basel Capital Ratio after Shock	Impact of Shock on Basel Capital Ratio
+100bp	14.9	−0.2
+200bp	14 4	−0.7
+300bp	13.7	−1.4

Source: Financial Stability Repart “Stress Tests of Banking Sector under Interest Rate Hike Scenarios,” Box 6, June 2017, Bank of Korea.

32. Macroprudential policies are addressing financial stability risks effectively. While the financial system is sound, macroprudential policies remain necessary to contain the risk from high household debt, which could have a large impact on consumption and growth if this risk were to materialize. The tightening of a variety of macroprudential measures (MPMs) appears to be effective in slowing lending to households and house price increases. LTVs and DTIs have been lowered to 40 percent for financial institutions; with larger reductions, to 30 percent, for borrowers with multiple mortgages and in regions where speculative buying is driving up prices. In 2018, a debt-service ratio limit will be implemented for all financial institutions to provide comprehensive coverage of all forms of debt, starting with banks in the middle of 2018 and NBFIs early in 2019. Risks are also being reduced by a rapid shift from floating rate to fixed rate, amortizing mortgage— which now constitute 47 percent of total mortgage loans—increasing households’ resilience to interest rate shocks. While credit growth has been higher for NBFIs, indicating some migration of risk to them from banks, this should be contained as both micro- and macro-prudential policies are being tightened in a harmonized fashion across different types financial institutions.

33. Measures targeting banks’ external financing risks have been adjusted as the macroprudential policy framework was overhauled. After the global financial crisis (GFC), the authorities introduced measures to prevent excessive build-up of short-term external liabilities and contain banks’ currency mismatch risks. These included a leverage cap on banks’ foreign exchange derivatives positions, and a levy on foreign exchange funding. These measures are assessed by staff as capital flow management measures as well as macroprudential measures (CFM/MPM). CFM/MPMs should be continuously reviewed and the authorities should consider alternative measures that directly address the systemic financial risks but are not designed to limit capital flows. The authorities have maintained them as preemptive measures for about seven years and adjusted the settings of each on three occasions as risks diminished. In July 2015, the levy was substantially restructured, including through a shift from contractual to residual maturity.

34. In January 2017, substantial reforms of the macroprudential policy framework targeting external risks were implemented. They included a new currency-differentiated liquidity-coverage-ratio (FX-LCR)—an MPM permitted under Basel III—and the abolishing of five existing measures that overlapped with the FX-LCR (the seven-day, one-month and three-month, maturity mismatch ratios on banks’ net foreign currency assets; the reserves requirement on high-quality foreign currency-denominated assets; and a non-mandatory foreign currency cash-equivalent ratio). However, they kept in place as preemptive MPMs the two pre-existing measures mentioned above to complement the new FX-LCR in the revised policy framework. These were retained after consideration of the alternative of a currency differentiated Net Stable Funding Ratio (NSFR). A standard Basel III NSFR is being implemented, and making it currency differentiated was considered unnecessary, given that currency mismatch risks are low. The rationale for these measures within this new, more transparent macroprudential policy framework is that they preemptively and more directly target the buildup of specific short-term FX risk on the liabilities side of banks’ balance sheets. The FX-LCR complements them by targeting the asset side of banks’ balance sheet to ensure that banks have sufficient high quality liquid foreign currency assets to cover potential net outflows for 30-days in a stress scenario.

35. Progress in corporate restructuring needs to be sustained. Rapid implementation of the strategy for financial and operational restructuring of distressed firms is critical to allow the reallocation of resources toward more productive and profitable sectors. The recent recapitalization of the policy banks EXIM and KDB was an important step to safeguard their financial stability and ensure that they remain able to fulfill their policy functions, including playing an important role in corporate restructuring. Social spending should be used to cushion the impact of firm restructuring on affected workers and help reallocate them to other activities. The involvement of the policy banks in the shipbuilding and shipping firms should be reviewed going forward as excess capacity narrows with the restructuring, and the outlook for shipping and shipbuilding industries improves with the rebound in global trade.

Authorities Views

36. The authorities regarded fiscal policy in 2018 as expansionary. They emphasized that next year government spending is expected to increase by 7.1 percent in nominal terms—the largest increase since 2010, and higher than nominal GDP growth. They recognized, though, that revenues were also projected to rise at a similar rate. They noted that no further significant change in fiscal stance would be implemented in 2018, but this could be reconsidered in future budgets. They were also concerned about efficiency of spending if public expenditure were increased very rapidly.

37. The BOK agreed that monetary policy should remain accommodative. They indicated that with the output gap narrowing and inflation close to target the process of monetary policy normalization should begin. They noted that markets were expecting at least one rate increase in 2018, and that the monetary policy would remain accommodative even if policy rates were to rise moderately.

38. The BOK believed that inflation expectations were well anchored. They recognized the merits of “inflation forecast targeting,” and noted that their communication already involved elements of it. They cautioned that implementing such framework in Korea involved risks, including a loss of credibility if projected policy rates differed significantly from the actual outcomes.

39. The authorities were closely monitoring the risks stemming from high household debt, especially in the context of likely interest rate increases. They noted that the supervisory authorities conducted quite extreme stress tests on the impact of interest rate hikes, and also assessed the impact on the most vulnerable borrowers. Overall, these showed that systemic risks were well contained. They added that the recently announced tightening of macroprudential policies would contribute to reduce risks, and that their full effect had not been felt yet. Capital flow volatility from monetary policy normalization by the Fed and ECB was not seen as a reason for great concern.

40. The authorities stressed that they adhere to the principle that the exchange rate is determined by the market. They clarified that intervention policy in foreign exchange market was limited to episodes of disorderly market conditions. This was the meaning of intervention in “periods of excessive volatility”. They noted that exchange rate flexibility would continue.

Addressing Long-Term Challenges

41. The current growth momentum presents an opportunity to implement ambitious reforms to reinvigorate long-term growth and foster inclusion. Social protection should be strengthened on a sustained basis, to address inequality, boost consumption-led growth and contribute to rebalancing. Moreover, with potential growth expected to continue being dampened by adverse demographics, and labor productivity still at about 50 percent of that in the U.S., the priority is to boost labor supply and productivity growth. While a number of policies will help increase consumption, for this increase to be sustainable, productivity growth must rise. This requires strengthening female labor force participation and bolstering youth employment, as well as implementing product and labor market reforms to support productivity gains. Labor market duality also needs to be addressed to reduce polarization and support job creation.

Fiscal Policy

42. Fiscal policy should be used to foster social protection and growth-enhancing structural reforms. At 10 percent of GDP, public social spending is Korea is less than half the OECD average. The strategy to lessen income inequality and promote consumption-led growth would involve higher targeted transfers for the most vulnerable. Staff supports the government’s intention to increase the share of spending towards social welfare. This should be accompanied by a reduction in the fiscal surplus to maximize the impact of these measures on growth and promote economic rebalancing. Fiscal policy should also be used to support potential growth by increasing spending on ALMP and childcare, which should bolster labor supply.

43. A policy package involving stronger safety nets, higher fiscal spending on ALPM and childcare, together with structural reforms would yield multiple benefits. Staff analysis indicates that, for example, additional spending for 1.5 percent of GDP on targeted transfers, childcare, and ALMP, accompanied by labor and product market reforms and a shift in the tax structure toward consumption taxes would boost output and consumption permanently by more than 6 percent and 9 percent in 10 years, respectively, and reduce the current account surplus by nearly 2 percent of GDP in 10 years (Box 3).

44. Korea has substantial fiscal space to implement a more active fiscal policy. With central government debt below 40 percent of GDP (below 45 percent of GDP including non-market nonprofit institutions’ debt) and an average consolidated central government surplus of 1.2 percent of GDP since 2010, Korea has one of the soundest fiscal positions among advanced economies. The debt-to-GDP ratio is expected to remain below 40 percent until at least 2032, with an average deficit of 0.7 percent of GDP, taking into account the increase in pension- and health-related public spending, and assuming no change in the revenue-to-GDP ratio.

45. In the longer term, fiscal challenges from the aging population will necessitate greater revenue mobilization. Outlays for pensions and healthcare are set to rise by 10-16 percent of GDP by 2060. ⁹ With unchanged revenues, the debt-to-GDP ratio would be on an unsustainable trajectory, and is projected to climb above 100 percent of GDP by 2050. This ratio would be increased further in the event of Korean reunification. However, with revenue increases, fiscal sustainability can be preserved. Various combinations of higher revenues and borrowing could be used to stabilize the debt-to-GDP ratio at levels below what is considered “dangerous.” Staff analysis indicates this to be around 85 percent of GDP for advanced economies, significantly above the 45 percent of GDP ceiling proposed to the National Assembly. Given Korea’s low public debt, aging-related fiscal spending could partly be financed through additional borrowing to avoid an abrupt increase in revenues that could hinder growth. Staff analysis identifies scenarios where, with revenue increases in the longer term, even with additional spending on social safety nets, childcare benefits and ALMP, government debt-to-GDP could be stabilized well below 85 percent. This would provide buffers to deal with the fiscal costs of a possible reunification.

46. Higher revenues could be achieved in the longer term by broadening the tax base. Korea’s tax revenue-to-GDP ratio is one of the lowest in the OECD, providing ample room to broaden the tax base with both efficiency and equity gains. The average effective personal income tax rate is low, and for the median wage earner it is close to zero. The base could be broadened by gradually eliminating deductions. Significant efficiency and revenue gains could come from addressing multiple distortions in corporate income taxation, including by reducing the number of corporate income tax rates to one. There is also a need for greater neutrality in the taxation of various sources of capital income. The VAT base could be broadened to cover all new real estate supplies (including the value of land) and fee-based financial services. Depending on the comprehensiveness of these base-broadening measures, it may still be necessary to raise some tax rates, notably the VAT which is relatively low at only 10 percent.

Box 3.

Addressing Korea’s Structural Challenges: The Role of Fiscal Policy

Fiscal policy can play an important role in supporting Korea’s long-term growth, mitigating inequality and promoting economic rebalancing through different channels. Higher public spending for childcare and active labor market policies can have significant impact on labor supply, and hence, potential output. Fiscal policies can also support labor and product market reforms that yield productivity gains by mitigating their distributive effects or other unintended short-term costs. Moreover, rebalancing the tax structure away from direct taxes that fall on labor and capital and towards indirect taxes on consumption (VAT) and property taxes would improve allocative efficiency. In addition, higher public welfare spending would provide support to the most vulnerable and reduce income uncertainty and household precautionary savings, which are contributing to external imbalances.

The benefits of fiscal policy measures are illustrated through simulations with the G20MOD module of the Flexible System of Global Models (FSGM). The scenario assumes a permanent increase in targeted transfers by 0.75 percent of GDP to the most vulnerable liquidity-constrained consumers, an expansion in childcare spending by 0.25 percent of GDP, and an increase in ALMP spending by 0.5 percent of GDP. These additional expenses are assumed to be financed through a combination of higher VAT revenues and lower surplus. Moreover, the scenario assumes that in 10 years Korea implements 75 percent of the product market and employment protection reforms that would allow the country’s regulation (as measured by the OECD Product Market Regulation Index) to converge to the average of the three OECD economies at the frontier. In addition, the simulation includes a shift toward a more growth-friendly tax structure. Specifically, the share of consumption and property taxes in total tax revenues is assumed to increase by 1.1 percentage points, accompanied by a decline in the share of labor income tax that boosts labor force participation.¹

This comprehensive policy would yield multiple benefits. Output and consumption would increase by about 6 percent and 9 percent, respectively in 10 years, and the current account surplus would decline by nearly 2.0 percent of GDP in 10 years. These results are in line with IMF research showing the benefits of complementary structural and fiscal policies.² They are consistent with the finding that, on average, major past episodes of deregulation of retail trade, professional services, and network sectors in advanced economies led to sizable increases in GDP. The package would imply a 11-percentage points increase in the debt-to-GDP ratio relative to the baseline scenario in 10 years and a 30 percentage points increase beyond 2100. The fiscal surplus would decline permanently by about 1.6 percentage points of GDP relative to the baseline.

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Impact of Fiscal Policy and Structural Reform Package

(Percent Difference from Baseline)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

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¹ For details and methodology see the Selected Issues Paper “A New Strategy for Korea’s Fiscal Policy in A Low Growth Environment.” ² International Monetary Fund, 2016, World Economic Outlook, Chapter 3.

Labor Market Policy

47. To address duality and boost job creation, Korea should adopt “flexicurity” as the basis for labor market policies. This involves three pillars: (i) more flexibility for regular workers; (ii) a strong and inclusive safety net for the unemployed; and (iii) Active Labor Market Policies. The fundamental principle of “flexicurity” is that it protects workers rather than jobs. This would create a new labor market structure that is essential to adapt to the demands of technological and structural change, as well as increase productivity by enhancing resource allocation and training. It would also raise labor force participation by incentivizing individuals to enter the labor market. Finally, it would enhance equity by reducing duality and protecting the vulnerable.

48. Implementing all three pillars is critical. The authorities are developing policies that cover some of the pillars, notably an expansion in unemployment insurance and an increase in job trainings programs. Only by eventually implementing all three pillars can an adequate balance between incentives, support, and protection be assured. For example, increasing unemployment insurance without raising flexibility would likely increase unemployment. While some measures might entail short-term costs, such as a transitory rise in unemployment, Korea has substantial fiscal space to cushion them and absorb the fiscal costs.

49. Policy measures to adopt flexicurity involve:

1. Flexibility. Korea has particularly strong restrictions on dismissal of regular workers. To strengthen job creation, the ability to dismiss regular workers for performance and other economic reasons should be eased. The current government plan to convert temporary workers to permanent workers would lower flexibility if it is not accompanied by measures to reduce rigidity of regular contracts.

2. Active Labor Market Policies. ALMPs will need to be expanded and its composition shifted from direct job creation to enhanced job training and matching. To ensure effectiveness, programs should provide personalized support to job seekers, target the most vulnerable such as women and youth, and be well-coordinated with passive labor market policies such as unemployment insurance and social assistance. They will also need to be continuously evaluated and adjusted to ensure effectiveness and adequacy.

3. Unemployment insurance. The government intention to increase coverage and level of unemployment insurance is welcome. It should also be linked to conditionality in areas such as training and job search.

50. Flexicurity needs a strong foundation to be successful. Trust and ownership by all social partners are critical, with all stakeholders part of the social dialogue, including non-unionized workers, SMEs and the self-employed. Furthermore, work arrangements need to become more flexible to meet the varying needs of individuals. This should include more flexible working hours and a move away from the strictly seniority-based wage system. Finally, an education system fostering a culture of life-long learning is essential to adapt to changing labor market conditions. Given the need for significant transformation and careful calibration, implementation of flexicurity will take time and will need to be continuously evaluated.

Box 4.

Introducing Flexicurity in Korea—A Modeling Exercise

Korea has ample room to move towards flexicurity along all three pillars. In particular, Korea has very strict regulation for regular workers in case of dismissal for performance or other economic reasons. This makes the process complex and costs of dismissal uncertain, as the probability of reinstatement is high. Korea’s unemployment insurance is also significantly less generous than most other OECD countries. The net replacement rate for the initial phase of unemployment is 56 percent, below the OECD average of 63 percent, and the maximum duration of unemployment benefits is 8 month compared to an OECD average of 18 month. Finally, spending on ALMP was around 4900 USD per unemployed, compared to the OECD average of 7000 USD. In addition, spending was concentrated largely on direct job creation and less on training and matching.

A modeling exercise suggests that Korea could gain significantly from moving towards flexicurity when implementing all three pillars. A search-and-matching model based on Dolado et al. (2017) is calibrated to Korea to model duality and simulate the impact of flexicurity policies.¹ Introducing only one pillar would result in trade-offs between output, inequality and unemployment and among different parts of the population. For example, a reduction in dismissal costs could significantly lower the wage gap between permanent and temporary workers and reduce the “revolving-door effect”, i.e. succeeding spells of short-term employment for temporary workers. However, it would also reduce job security and income of permanent workers, thereby lowering their welfare. ALMP that raise training or improve matching would raise output and lower unemployment. Yet, they also have the potential to exacerbate duality as they make the applicant pool more attractive and incentivize firms to keep rotating temporary workers and pay them lower wages. Introducing all pillars however would lead to improvements along all three dimensions and could raise welfare of everyone if calibrated appropriately.

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Introducing Flexicurity

(percentage change to baseline)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

Sources; authors’ calculations.Note: Inequality is measured by trie Gini Coefficient.

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¹ See the Selected Issues Paper “Labor Market Duality in Korea.”

51. Boosting youth employment is an important priority. Korea’s youth employment rate has fallen significantly during the past decade and is now about 10 percentage points below the OECD average.¹⁰ Moreover, the share of youth who are neither in employment nor in education or training is large—18 percent, compared to less than 10 percent in many OECD economies. To support youth employment, existing measures such as Meister schools, the work-study dual system, and internships could be strengthened. This involves increasing ownership by businesses and ensuring the quality of placements, to guarantee accumulation of on-the-job skills and enhance career prospects. A comprehensive policy framework should be put in place to ensure coordination and coherence, and continuously evaluate programs and their impact. In addition, preemptive measures – as practiced in Denmark – could be introduced, including the development of education plans in lower secondary education. This would help children, who are investing a lot of resources at an early age, by developing realistic and individual education and career plans. Raising SMEs’ productivity and reducing labor market duality would ensure availability of quality employment and reduce incentives for “queueing” for regular employment.

52. While there is scope to increase public employment, the government should be cautious in expanding the number of public employees to create jobs. The government is planning to create 514,000 new jobs in the government and public corporations, and to convert 300,00 public sector workers into regular employment. There is room to expand jobs in the areas of civil and social services, such as police and firefighters. Currently, public employment is around 8 percent of total, well below the OECD average of 21 percent. However, public employment should not be used as a tool to create jobs, including for the young. Public sector job creation should be linked to developing or expanding services that cannot be provided adequately by the private sector. Also, there is a risk that public employment might crowd out private employment. Moreover, country experience suggests that public employment programs are typically ineffective in boosting youth employment, due to difficulties in transferring the acquired skills to private sector occupations.

53. The planned increase in the minimum wage in 2018 should support growth, but caution is warranted in implementing further large increases. The increase in the minimum wage by 16.4 percent for 2018 will boost incomes of low-wage earners and overall consumption, as their propensity to consume is significantly higher than that of higher-wage earners. However, low-skilled labor may face greater difficulty finding jobs. Looking ahead, further sharp increases that would raise the minimum closer to the average wage, which is currently already around the OECD average, could erode competitiveness.¹¹ Thus, it would be advisable to assess the impact of the current hike before announcing additional ones. To partially compensate small businesses for the increased labor cost, the government plans to pay part of the additional burden, which is estimated at KRW 3 trillion (0.2 percent of GDP) for 2018. Subsidies to compensate SMEs for the increase should be temporary.

Box 5.

Minimum Wage

One of the key pillars of the new administration’s “paradigm shift to sustainable growth” is income-led growth, which includes raising the minimum wage from the current level of KRW 6,470 ($6.2; PPP terms) to KRW 10,000 per hour in the medium term. In line with this policy direction, the Tri-partite Minimum Wage Commission increased the minimum wage for 2018 to KRW 7,530 ($7.2; PPP terms) per hour, a 16.4 percent rise compared to this year.

The 16.4 percent hike in the 2018 minimum wage is unprecedented. It is the highest in real terms since the minimum wage system was established, and it significantly exceeds increases in output and inflation.

The minimum wage hike should boost consumption. Low-wage earners will see a significant increase in their incomes, and they have substantially higher propensity to consume than high-income earners. Competitiveness is not expected to erode, because only around 7 percent of the workers receive the minimum wage, the ratio of minimum to average wage remains close to the OECD average, and there are no apparent signs that the average wage is out of sync with productivity. However, some low-skilled jobs will likely be lost, especially in sectors where the producers cannot pass on the additional cost to consumers.

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Korea’s Minimum Wage

(Change, in percent)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

Sources: OECD Database IMF World Economic Outlook Staff calculations.

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OECD - Minimum relative to average wages of full-time workers - 2016

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

Sources: OECD Database: Staff calculations.

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Productivity and Wages - 2016

(in USD, PPP)

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

Sources: OECD and staff calculations.

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There is a risk that further hikes could bring the minimum wage too close to the average wage, which could hurt the economy. France’s experience could be a relevant example. France introduced the minimum wage in 1950, and in 1970, establishing “SMIC” (Salaire Minimum Interprofessionnel de Croissance), which linked the minimum wage to increases in purchasing power of blue-collar workers, in addition to CPI inflation. Discretionary increases by a commission (“coups de pouce”) were also introduced. This lead to a substantial increase in the ratio of minimum to average wage from below 35 percent in 1968 to above 50 percent by 1980s. These changes in minimum wage policy lowered wage inequality by increasing wages at the bottom. However, several studies showed that high minimum wages priced low-skilled workers and youth out of the market, thereby contributing to high unemployment. Recognizing the negative impact of high minimum wages, the governments since 1990s have implemented a number of measures to alleviate the burden. They largely aimed to reduce labor costs through lowering the social contributions of employers and providing targeted tax credits to promote consumption of household services. These policies managed to stabilize low-skilled employment. However, the fiscal cost of these measures was high at around 1 percent of GDP in 2007. To ensure that changes to the minimum wage better reflect economic conditions the government introduced a commission of independent experts in 2008 to give official advice each year on “coups de pouce.”

54. Efforts to enhance the participation and leadership of women in the labor market should continue. Korea’s female labor force participation is one of the lowest in the OECD— 20 percentage points below the best performers. Moreover, the share of women in regular jobs remains at 40 percent; women are paid on average about 37 percent less than men and take up just 2 percent of senior management positions, compared to the OECD average of 20 percent. A mix of policies are needed to foster female labor force participation, including: strengthening quality and affordability of childcare services; promoting shared parental leave; making the tax treatment of second earners more neutral; and introducing benchmarks for employment and leadership of women by corporations. Broader measures that improve work-life balance, including the reduction in working hours, and mitigate labor market duality would also help. The government is planning to introduce several measures in this regard: e.g., enhancing government assistance for women’s reemployment; reducing gender wage gaps; raising paternity leave allowance; and expanding government support from childcare services. These efforts would reduce income inequality across genders and raise potential growth by boosting labor supply. Furthermore, adding a second earner to families could lower the demand for job security among regular workers as the risk of income loss is cushioned.

Product Markets

55. The government has announced a plan to support innovation and foster productivity growth. They include (i) building eco-system and infrastructure for innovation; (ii) reducing regulatory cost; (iii) expanding capital provision and safety net for start-ups; and (iv) establishing a national innovation cluster. The authorities also intend to foster SMEs as a new growth engine, supports the establishment of networks to promote economies of scale for SMEs, and introduce cooperative SMEs.

56. The government is also taking measures to promote fair competition between large corporations and smaller firms. This requires changes in the regulation, and its implementation, to reduce the monopsony power of the largest companies vis-a-vis the smaller firms working for them. It also involves enhancing corporate governance. These are important steps to foster competition and strengthen SMEs.

57. Steps should be taken to ease the regulatory burden for firms especially in the service sectors. Korea’s product market regulation is one of the fourth-most stringent in the OECD, reflecting in part regulations in network industries (e.g., electricity, gas, and rail).¹² While the regulatory burdens have been eased in some cases, such as railways and telecommunication, further deregulation is needed. Staff estimates that if the regulatory burden (as measured by the OECD Product Market Regulation index) were further lowered to close the gap with the OECD frontier in 10 years, potential output could increase by 3.5 percent in the long run, and yearly potential growth could rise by more than 0.3 percentage points for ten years.¹³

58. Enhancing the design of incentives to innovations and R&D programs would help boost innovation and productivity growth. This requires (i) shifting size-based subsidies and tax incentives to targeting young firms to enhance incentives for firms to grow; (ii) invigorating research in higher education institutions by expanding international collaboration and competition to foster innovation at the frontier; and (iii) ensuring that R&D incentives do not discriminate against certain service industries and are well tailored to special needs of young firms (e.g. carry-over provisions). In general, R&D support should be well coordinated, based on an objective selection process and continuously evaluated. As for SMEs, government policy should prioritize fostering growth and innovation, rather than shielding weak firms. These measures would also support employment.

Authorities Views

59. The authorities agreed that revenues needed to increase in the longer term to preserve fiscal sustainability. They were planning to broaden the tax base very gradually. Increasing the VAT rate might face opposition. They also had concerns that reducing the number of corporate income tax rates would aggravate the burden for SMEs.

60. The authorities mentioned that Korea should aim for achieving security and flexibility in the labor market. They highlighted that it is necessary to improve “security” for workers before bringing flexibility to the labor market and that safety nets for the unemployed are much lower than in other OECD countries. They agreed with the staff ‘s view that it will be critical to build more trust between the social partners to implement labor market reforms. On the expansion of public sector employment, they highlighted that it would be different from past public employment programs. The objective is to enhance needed public services and convert into regular contracts public employees that are engaged in work of a permanent and continuous nature. They do not see a risk of crowding out private sector employment because the expansion will be in the public service that cannot be provided adequately by the private sector.

61. The authorities agreed on the need to ease the regulatory burden for firms. They were planning to introduce a “regulatory sandbox” to achieve tangible outcomes as quickly as possible. They pointed out that this was part of a broader paradigm shift, which also required reforms in the areas of human resources, innovation, and the job market.

Staff Appraisal

62. A cyclical recovery is underway despite heightened geopolitical tensions, but potential growth has slowed down. Long-term growth is hindered by adverse demographics and slowing productivity growth, driven by structural weaknesses. Income inequality and polarization are worsening, partly reflecting inadequate social protection and labor and product market duality. Korea’s external position is stronger than warranted by medium-term fundamentals and desirable policies.

63. Fiscal policy should become significantly more expansionary to support growth and reduce excessive external imbalances. Staff recommends that the government reduce the structural balance toward zero by at least 0.5 percentage point each year during the coming years. Korea has substantial fiscal space to aim for a zero-structural balance in the short and medium run without a risk to debt sustainability. In the longer term, fiscal challenges from the aging population will necessitate greater revenue mobilization.

64. Monetary policy should remain accommodative as inflationary pressures are likely to remain subdued. Early and decisive action to ease the fiscal stance would facilitate a rebalancing of the policy mix. Monetary policy credibility could be enhanced by strengthening communication of policy intentions. This involves clarifying the BOK’s “policy reaction function” that describes the conditions under which it will adjust policy rates in the future. The exchange rate should continue to be allowed to move flexibly, with intervention limited to addressing disorderly market conditions.

65. Macroprudential policies are effectively addressing financial stability challenges. They remain necessary to contain risks from high household debt. Corporate restructuring has to proceed expeditiously.

66. Fiscal policy should be used to enhance social safety nets and support long-term growth. A targeted expansion in social spending would mitigate income inequality, promote consumption-led growth and economic rebalancing. Staff supports the government’s intention to increase the share of spending towards social welfare. This needs to be accompanied by a reduction in the fiscal surplus to maximize the impact on growth. Public spending on ALMP and childcare should also increase to boost labor supply and potential output.

67. To mitigate duality and support job creation, Korea should adopt “flexicurity” in the labor market. This involves three pillars: (i) more flexibility for regular workers; (ii) a strong and inclusive safety net for the unemployed; and (iii) Active Labor Market Policies. Implementing all three pillars is critical. While there is scope to expand public sector jobs, the government should be cautious in expanding public employment to create jobs. The minimum wage should be increased cautiously going forward and any compensatory subsidy to SMEs should be temporary. To support youth employment, existing measures such as Meister schools, the work-study dual system, and internships could be strengthened. Policies should also focus on strengthening female labor force participation and leadership.

68. The regulatory burden for firms should be eased especially in the service sector. Government policy towards SMEs should prioritize fostering growth and innovation, rather than shielding weaker firms. Finally, there is scope to better design and coordinate R&D support.

69. Staff recommend that the next Article IV consultation be held on the standard 12-month cycle.

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Korea: Recent Economic Developments

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

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Korea: Recent Financial Developments

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

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Korea: External Sector

Citation: IMF Staff Country Reports 2018, 040; 10.5089/9781484341537.002.A001

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Table 1.

Korea: Selected Economic Indicators, 2014–18

Sources: Korean authorities; and IMF staff estimates and projections.

^1/Contribution to GDP growth.

^2/Excludes gold.

^3/Debt service on medium- and long-term debt in percent of exports of goods and services.

Table 1.

Korea: Selected Economic Indicators, 2014–18

								Projections
					2014	2015	2016	2017	2018
Real GDP (percent change)					3.3	2.8	2.8	3.2	3.0
	Total domestic demand				3.1	4.0	3.7	5.0	3.0
		Final domestic demand			2.5	3.2	3.6	4.8	2.9
				Consumption	2.0	2.4	2.9	2.8	3.3
				Gross fixed investment	3.4	5.1	5.2	9.0	2.3
		Stock building 1/			0.0	0.5	−1.5	0.2	0.0
	Net foreign balance 1/				0.4	−1.1	−1.0	−1.9	0.3
Nominal GDP (in trillions of won)					1,486	1,564	1,637	1,732	1,805
Saving and investment (in percent of GDP)
	Gross national saving				34.5	35.6	35.7	36.6	36.0
	Gross domestic investment				29.3	28.9	29.2	31.0	30.7
	Current account balance				6.0	7.7	7.0	5.6	5.4
Prices (percent change)
	CPI inflation (end of period)				0.8	1.1	1.3	2.1	1.9
	CPI inflation (average)				1.3	0.7	1.0	2.0	1.9
	Core inflation (average)				1.7	2.4	1.9	…	…
	GDP deflator				0.6	2.4	1.8	2.4	1.1
	Real effective exchange rate				6.6	1.3	−1.9	…	…
Trade (percent change)
	Export volume				4.3	2.5	1.0	5.4	3.7
	Import volume				4.6	3.2	1.2	8.2	3.6
	Terms of trade				1.7	12.0	1.0	0.4	−0.9
Consolidated central government (in percent of GDP)
	Revenue				21.2	21.5	22.5	22.4	22.7
	Expenditure				20.8	20.9	20.7	21.2	21.2
	Net lending (+) / borrowing (-)				0.4	0.6	1.7	1.2	1.4
	Overall balance (authorities)				0.6	0.0	1.0	0.8	1.0
			Excluding Social Security Funds		−2.0	−2.4	−1.4	−1.7	−1.6
	Structural balance				0.6	0.8	2.0	1.4	1.5
General government debt					35.9	37.8	38.3	37.6	37.3
Central government debt					33.9	35.6	36.1	35.4	35.1
Money and credit (end of period)
	Credit growth				7.4	7.6	7.3	6.2	6.1
	Overnight call rate				2.0	1.5	1.3	…	…
	Three-year AA- corporate bond yield				2.4	2.1	2.1	…	…
	M3 growth				8.7	9.0	7.9	7.9	7.9
Balance of payments (in billions of U.S. dollars)
	Exports, f.o.b.				613.0	542.9	511.9	569.1	603.3
	Imports, f.o.b.				524.1	420.6	393.1	446.6	476.9
		Oil imports			94.9	55.1	44.3	57.3	65.9
	Current account balance				84.4	105.9	99.2	85.6	88.7
	Gross international reserves (end of period) 2/				358.8	363.2	366.3	366.9	368.5
		In percent of short-term debt (residual maturity)			208.8	231.6	236.6	240.5	240.1
External debt (in billions of U.S. dollars)
	Total external debt (end of period)				424.3	396.1	380.9	364.9	354.0
		Of which : Short-term (end of period)			116.4	104.3	105.2	106.0	106.9
	Total external debt (in percent of GDP)				30.1	28.6	27.0	23.8	21.4
	Debt service ratio 3/				7.9	9.0	9.3	8.4	7.8

Sources: Korean authorities; and IMF staff estimates and projections.

^1/Contribution to GDP growth.

^2/Excludes gold.

^3/Debt service on medium- and long-term debt in percent of exports of goods and services.

View Table

Table 1.

Korea: Selected Economic Indicators, 2014–18

								Projections
					2014	2015	2016	2017	2018
Real GDP (percent change)					3.3	2.8	2.8	3.2	3.0
	Total domestic demand				3.1	4.0	3.7	5.0	3.0
		Final domestic demand			2.5	3.2	3.6	4.8	2.9
				Consumption	2.0	2.4	2.9	2.8	3.3
				Gross fixed investment	3.4	5.1	5.2	9.0	2.3
		Stock building 1/			0.0	0.5	−1.5	0.2	0.0
	Net foreign balance 1/				0.4	−1.1	−1.0	−1.9	0.3
Nominal GDP (in trillions of won)					1,486	1,564	1,637	1,732	1,805
Saving and investment (in percent of GDP)
	Gross national saving				34.5	35.6	35.7	36.6	36.0
	Gross domestic investment				29.3	28.9	29.2	31.0	30.7
	Current account balance				6.0	7.7	7.0	5.6	5.4
Prices (percent change)
	CPI inflation (end of period)				0.8	1.1	1.3	2.1	1.9
	CPI inflation (average)				1.3	0.7	1.0	2.0	1.9
	Core inflation (average)				1.7	2.4	1.9	…	…
	GDP deflator				0.6	2.4	1.8	2.4	1.1
	Real effective exchange rate				6.6	1.3	−1.9	…	…
Trade (percent change)
	Export volume				4.3	2.5	1.0	5.4	3.7
	Import volume				4.6	3.2	1.2	8.2	3.6
	Terms of trade				1.7	12.0	1.0	0.4	−0.9
Consolidated central government (in percent of GDP)
	Revenue				21.2	21.5	22.5	22.4	22.7
	Expenditure				20.8	20.9	20.7	21.2	21.2
	Net lending (+) / borrowing (-)				0.4	0.6	1.7	1.2	1.4
	Overall balance (authorities)				0.6	0.0	1.0	0.8	1.0
			Excluding Social Security Funds		−2.0	−2.4	−1.4	−1.7	−1.6
	Structural balance				0.6	0.8	2.0	1.4	1.5
General government debt					35.9	37.8	38.3	37.6	37.3
Central government debt					33.9	35.6	36.1	35.4	35.1
Money and credit (end of period)
	Credit growth				7.4	7.6	7.3	6.2	6.1
	Overnight call rate				2.0	1.5	1.3	…	…
	Three-year AA- corporate bond yield				2.4	2.1	2.1	…	…
	M3 growth				8.7	9.0	7.9	7.9	7.9
Balance of payments (in billions of U.S. dollars)
	Exports, f.o.b.				613.0	542.9	511.9	569.1	603.3
	Imports, f.o.b.				524.1	420.6	393.1	446.6	476.9
		Oil imports			94.9	55.1	44.3	57.3	65.9
	Current account balance				84.4	105.9	99.2	85.6	88.7
	Gross international reserves (end of period) 2/				358.8	363.2	366.3	366.9	368.5
		In percent of short-term debt (residual maturity)			208.8	231.6	236.6	240.5	240.1
External debt (in billions of U.S. dollars)
	Total external debt (end of period)				424.3	396.1	380.9	364.9	354.0
		Of which : Short-term (end of period)			116.4	104.3	105.2	106.0	106.9
	Total external debt (in percent of GDP)				30.1	28.6	27.0	23.8	21.4
	Debt service ratio 3/				7.9	9.0	9.3	8.4	7.8

Sources: Korean authorities; and IMF staff estimates and projections.

^1/Contribution to GDP growth.

^2/Excludes gold.

^3/Debt service on medium- and long-term debt in percent of exports of goods and services.

Table 2.

Korea: Medium-Term Projections, 2015–2022

Sources: Korean authorities; and IMF staff estimates and projections.

^1/Contribution to GDP growth.

^2/Depository corporations credit to private sector.

^3/Customs clearance basis.

^4/Includes offshore borrowing of domestic financial institutions and debt contracted by their overseas branches.

^5/Debt service on medium- and long-term debt in percent of exports of goods and services.

Table 2.

Korea: Medium-Term Projections, 2015–2022

					Projections
					2015	2016	2017	2018	2019	2020	2021	2022
Real GDP (percent change)					2.8	2.8	3.2	3.0	2.9	2.8	2.7	2.6
		Total domestic demand			3.8	2.0	5.0	3.0	3.1	3.1	3.1	3.1
			Final domestic demand		3.2	3.6	4.8	2.9	3.1	3.1	3.1	3.1
				Consumption	2.4	2.9	2.8	3.3	3.3	3.2	3.2	3.2
				Gross fixed investment	5.1	5.2	9.0	2.3	2.7	2.7	2.8	2.8
			Stock building 1/		0.5	−1.5	0.2	0.0	0.0	0.0	0.0	0.0
		Net foreign balance 1/			−1.1	−1.0	−1.9	0.3	0.0	−0.1	−0.2	−0.3
Prices, period average (percent change)
		Consumer price			0.7	1.0	2.0	1.9	1.9	2.0	2.0	2.0
		GDP deflator			2.4	1.8	2.4	1.1	2.0	2.1	2.1	2.1
Savings and investment (in percent of GDP)
	Gross national savings				36.6	36.2	36.6	36.0	36.0	35.9	35.8	35.7
	Gross domestic investment				28.9	29.2	31.0	30.7	30.4	30.3	30.2	30.1
	Current account balance				7.7	7.0	5.6	5.4	5.5	5.6	5.6	5.5
Money and credit (end of period)
	Credit growth 2/				7.6	7.3	6.2	6.1	5.9	5.9	5.9	5.9
Consolidated central government (in percent of GDP)
		Revenue			21.5	22.5	22.4	22.7	22.8	22.6	22.5	22.5
		Expenditure			20.9	20.7	21.2	21.2	21.4	21.5	21.5	21.4
		Net lending (+) / borrowing (-)			0.6	1.7	1.2	1.4	1.4	1.2	1.1	1.1
		Overall balance (authorities)			0.0	1.0	0.8	1.0	1.0	0.8	0.7	0.8
			Excluding Social Security Funds		−2.4	−1.4	−1.7	−1.6	−1.8	−2.0	−2.1	−2.1
Trade (percent change)
		Merchandise exports			−11.4	−5.7	11.2	6.0	4.7	4.3	4.4	3.9
			Volumes 3/		2.5	0.8	5.4	3.7	3.9	3.7	3.6	3.5
		Merchandise imports			−19.8	−6.6	13.6	6.8	4.2	4.5	4.9	4.3
			Volumes 3/		3.1	1.1	8.2	3.6	3.8	3.9	3.9	4.0
		Terms of trade			12.0	1.0	0.4	−0.9	0.3	0.1	−0.2	0.2
Balance of payments (in billions of U.S. dollars)
		Current account			105.9	99.2	85.6	88.7	95.3	101.1	104.2	107.0
			(In percent of GDP)		7.7	7.0	5.6	5.4	5.5	5.6	5.6	5.5
			Trade balance		122.3	118.9	122.5	126.4	134.4	139.3	142.7	146.6
				Merchandise exports	542.9	511.9	569.1	603.3	631.5	658.6	687.7	714.8
				Merchandise imports	420.6	393.1	446.6	476.9	497.2	519.3	545.0	568.2
External debt
		In billions of U.S. dollars 4/			396.1	380.9	364.9	354.0	347.8	343.0	340.2	338.7
			(In percent of GDP)		28.6	27.0	23.8	21.4	20.2	19.1	18.2	17.5
				Of which : Short-term (end of period)	7.5	7.5	6.9	6.5	6.2	6.0	5.8	5.7
		Debt service ratio 5/			9.0	9.3	8.4	7.8	7.7	7.4	6.8	6.3
Memorandum items:
		Nominal GDP (in trillions of won)			1,564	1,637	1,732	1,805	1,895	1,989	2,087	2,188
		Per capita GDP (in U.S. dollars)			27,097	27,533	29,748	31,957	33,248	34,493	35,710	36,940
		Output gap (percent of potential GDP)			−1.1	−1.1	−0.6	−0.3	−0.1	0.0	0.1	0.1

Sources: Korean authorities; and IMF staff estimates and projections.

^1/Contribution to GDP growth.

^2/Depository corporations credit to private sector.

^3/Customs clearance basis.

^4/Includes offshore borrowing of domestic financial institutions and debt contracted by their overseas branches.

^5/Debt service on medium- and long-term debt in percent of exports of goods and services.

View Table

Table 2.

Korea: Medium-Term Projections, 2015–2022

					Projections
					2015	2016	2017	2018	2019	2020	2021	2022
Real GDP (percent change)					2.8	2.8	3.2	3.0	2.9	2.8	2.7	2.6
		Total domestic demand			3.8	2.0	5.0	3.0	3.1	3.1	3.1	3.1
			Final domestic demand		3.2	3.6	4.8	2.9	3.1	3.1	3.1	3.1
				Consumption	2.4	2.9	2.8	3.3	3.3	3.2	3.2	3.2
				Gross fixed investment	5.1	5.2	9.0	2.3	2.7	2.7	2.8	2.8
			Stock building 1/		0.5	−1.5	0.2	0.0	0.0	0.0	0.0	0.0
		Net foreign balance 1/			−1.1	−1.0	−1.9	0.3	0.0	−0.1	−0.2	−0.3
Prices, period average (percent change)
		Consumer price			0.7	1.0	2.0	1.9	1.9	2.0	2.0	2.0
		GDP deflator			2.4	1.8	2.4	1.1	2.0	2.1	2.1	2.1
Savings and investment (in percent of GDP)
	Gross national savings				36.6	36.2	36.6	36.0	36.0	35.9	35.8	35.7
	Gross domestic investment				28.9	29.2	31.0	30.7	30.4	30.3	30.2	30.1
	Current account balance				7.7	7.0	5.6	5.4	5.5	5.6	5.6	5.5
Money and credit (end of period)
	Credit growth 2/				7.6	7.3	6.2	6.1	5.9	5.9	5.9	5.9
Consolidated central government (in percent of GDP)
		Revenue			21.5	22.5	22.4	22.7	22.8	22.6	22.5	22.5
		Expenditure			20.9	20.7	21.2	21.2	21.4	21.5	21.5	21.4
		Net lending (+) / borrowing (-)			0.6	1.7	1.2	1.4	1.4	1.2	1.1	1.1
		Overall balance (authorities)			0.0	1.0	0.8	1.0	1.0	0.8	0.7	0.8
			Excluding Social Security Funds		−2.4	−1.4	−1.7	−1.6	−1.8	−2.0	−2.1	−2.1
Trade (percent change)
		Merchandise exports			−11.4	−5.7	11.2	6.0	4.7	4.3	4.4	3.9
			Volumes 3/		2.5	0.8	5.4	3.7	3.9	3.7	3.6	3.5
		Merchandise imports			−19.8	−6.6	13.6	6.8	4.2	4.5	4.9	4.3
			Volumes 3/		3.1	1.1	8.2	3.6	3.8	3.9	3.9	4.0
		Terms of trade			12.0	1.0	0.4	−0.9	0.3	0.1	−0.2	0.2
Balance of payments (in billions of U.S. dollars)
		Current account			105.9	99.2	85.6	88.7	95.3	101.1	104.2	107.0
			(In percent of GDP)		7.7	7.0	5.6	5.4	5.5	5.6	5.6	5.5
			Trade balance		122.3	118.9	122.5	126.4	134.4	139.3	142.7	146.6
				Merchandise exports	542.9	511.9	569.1	603.3	631.5	658.6	687.7	714.8
				Merchandise imports	420.6	393.1	446.6	476.9	497.2	519.3	545.0	568.2
External debt
		In billions of U.S. dollars 4/			396.1	380.9	364.9	354.0	347.8	343.0	340.2	338.7
			(In percent of GDP)		28.6	27.0	23.8	21.4	20.2	19.1	18.2	17.5
				Of which : Short-term (end of period)	7.5	7.5	6.9	6.5	6.2	6.0	5.8	5.7
		Debt service ratio 5/			9.0	9.3	8.4	7.8	7.7	7.4	6.8	6.3
Memorandum items:
		Nominal GDP (in trillions of won)			1,564	1,637	1,732	1,805	1,895	1,989	2,087	2,188
		Per capita GDP (in U.S. dollars)			27,097	27,533	29,748	31,957	33,248	34,493	35,710	36,940
		Output gap (percent of potential GDP)			−1.1	−1.1	−0.6	−0.3	−0.1	0.0	0.1	0.1

Sources: Korean authorities; and IMF staff estimates and projections.

^1/Contribution to GDP growth.

^2/Depository corporations credit to private sector.

^3/Customs clearance basis.

^4/Includes offshore borrowing of domestic financial institutions and debt contracted by their overseas branches.

^5/Debt service on medium- and long-term debt in percent of exports of goods and services.

Table 3.

Korea: Balance of Payments, 2013–18

(In billions of U.S. dollars, unless otherwise indicated, BPM6 sign)

Sources: Korean authorities; and IMF staff estimates and projections.

^1/Includes financial derivatives, net.

Table 3.

Korea: Balance of Payments, 2013–18

(In billions of U.S. dollars, unless otherwise indicated, BPM6 sign)

								Projections
				2013	2014	2015	2016	2017	2018
Current account balance				81.1	84.4	105.9	99.2	85.6	88.7
	Trade balance			82.8	88.9	122.3	118.9	122.5	126.4
		Exports		618.2	613.0	542.9	511.9	569.1	603.3
			(growth rate, in percent)	2.4	−0.8	−11.4	−5.7	11.2	6.0
		Imports		535.4	524.1	420.6	393.1	446.6	476.9
			(growth rate, in percent)	−3.4	−2.1	−19.8	−6.6	13.6	6.8
	Services			−6.5	−3.7	−14.9	−17.7	−33.7	−35.6
	Primary income			9.1	4.2	3.6	3.9	3.2	4.9
	Secondary income			−4.2	−5.0	−5.0	−5.8	−6.3	−7.0
Financial and capital account balance				63.8	71.5	94.3	95.0	85.0	87.1
	Financial account			63.8	71.4	94.2	95.0	85.0	87.1
		Portfolio investment, net 1/		4.9	26.8	51.3	63.5	51.9	52.1
		Direct investment, net		15.6	18.8	19.7	17.9	19.4	20.9
			Inflows	12.8	9.3	4.1	12.1	12.1	12.1
			Outflows	28.4	28.0	23.8	30.0	31.5	33.0
		Other investment, assets		37.1	38.4	16.0	14.4	12.8	13.3
		Other investment, liabilities		−6.2	12.5	−7.3	0.8	−1.0	−0.8
			Of which: trade credits	0.3	−0.5	−4.4	0.6	−1.2	−1.0
			Of which: short-term loans	−5.7	5.6	−0.8	2.0	2.0	2.0
			Of which: medium- and long-term loans	−0.5	5.3	1.1	−4.8	−4.8	−4.8
	Capital account			0.0	0.0	−0.1	0.0	0.0	0.0
Net errors and omissions				−1.0	5.0	0.4	3.4	0.0	0.0
Overall balance				−16.3	−17.9	−12.1	−7.6	−0.6	−1.6
Financing				16.3	17.9	12.1	7.6	0.6	1.6
	Change in reserves (increase +)			16.3	17.9	12.1	7.6	0.6	1.6
	Net IMF purchases			0.0	0.0	0.0	0.0	0.0	0.0
	World Bank/AsDB 1/			0.0	0.0	0.0	0.0	0.0	0.0
Memorandum items:
	Current account balance (in percent of GDP)			6.2	6.0	7.7	7.0	5.6	5.4
	Trade balance (in percent of GDP)			6.3	6.3	8.8	8.4	8.0	7.7
	Gross reserves minus gold			341.7	358.8	363.2	366.3	366.9	368.5
		(in months of imports of goods and services)		6.4	6.7	8.2	8.7	7.7	7.2
	External debt			423.5	424.3	396.1	380.9	364.9	354.0
		(in percent of GDP)		32.4	30.1	28.6	27.0	23.8	21.4
	Short-term external debt (inc. trade credits)			111.8	116.4	104.3	105.2	106.0	106.9
	Nominal GDP (U.S. dollars)			1305.4	1411.0	1382.4	1411.0	1530.7	1651.0

Sources: Korean authorities; and IMF staff estimates and projections.

^1/Includes financial derivatives, net.

View Table

Table 3.

Korea: Balance of Payments, 2013–18

(In billions of U.S. dollars, unless otherwise indicated, BPM6 sign)

								Projections
				2013	2014	2015	2016	2017	2018
Current account balance				81.1	84.4	105.9	99.2	85.6	88.7
	Trade balance			82.8	88.9	122.3	118.9	122.5	126.4
		Exports		618.2	613.0	542.9	511.9	569.1	603.3
			(growth rate, in percent)	2.4	−0.8	−11.4	−5.7	11.2	6.0
		Imports		535.4	524.1	420.6	393.1	446.6	476.9
			(growth rate, in percent)	−3.4	−2.1	−19.8	−6.6	13.6	6.8
	Services			−6.5	−3.7	−14.9	−17.7	−33.7	−35.6
	Primary income			9.1	4.2	3.6	3.9	3.2	4.9
	Secondary income			−4.2	−5.0	−5.0	−5.8	−6.3	−7.0
Financial and capital account balance				63.8	71.5	94.3	95.0	85.0	87.1
	Financial account			63.8	71.4	94.2	95.0	85.0	87.1
		Portfolio investment, net 1/		4.9	26.8	51.3	63.5	51.9	52.1
		Direct investment, net		15.6	18.8	19.7	17.9	19.4	20.9
			Inflows	12.8	9.3	4.1	12.1	12.1	12.1
			Outflows	28.4	28.0	23.8	30.0	31.5	33.0
		Other investment, assets		37.1	38.4	16.0	14.4	12.8	13.3
		Other investment, liabilities		−6.2	12.5	−7.3	0.8	−1.0	−0.8
			Of which: trade credits	0.3	−0.5	−4.4	0.6	−1.2	−1.0
			Of which: short-term loans	−5.7	5.6	−0.8	2.0	2.0	2.0
			Of which: medium- and long-term loans	−0.5	5.3	1.1	−4.8	−4.8	−4.8
	Capital account			0.0	0.0	−0.1	0.0	0.0	0.0
Net errors and omissions				−1.0	5.0	0.4	3.4	0.0	0.0
Overall balance				−16.3	−17.9	−12.1	−7.6	−0.6	−1.6
Financing				16.3	17.9	12.1	7.6	0.6	1.6
	Change in reserves (increase +)			16.3	17.9	12.1	7.6	0.6	1.6
	Net IMF purchases			0.0	0.0	0.0	0.0	0.0	0.0
	World Bank/AsDB 1/			0.0	0.0	0.0	0.0	0.0	0.0
Memorandum items:
	Current account balance (in percent of GDP)			6.2	6.0	7.7	7.0	5.6	5.4
	Trade balance (in percent of GDP)			6.3	6.3	8.8	8.4	8.0	7.7
	Gross reserves minus gold			341.7	358.8	363.2	366.3	366.9	368.5
		(in months of imports of goods and services)		6.4	6.7	8.2	8.7	7.7	7.2
	External debt			423.5	424.3	396.1	380.9	364.9	354.0
		(in percent of GDP)		32.4	30.1	28.6	27.0	23.8	21.4
	Short-term external debt (inc. trade credits)			111.8	116.4	104.3	105.2	106.0	106.9
	Nominal GDP (U.S. dollars)			1305.4	1411.0	1382.4	1411.0	1530.7	1651.0

Sources: Korean authorities; and IMF staff estimates and projections.

^1/Includes financial derivatives, net.

Table 4.

Korea: Statement of Central Government Operations, 2014–18

Sources: Ministry of Strategy and Finance; and IMF staff estimates and projections.

Table 4.

Korea: Statement of Central Government Operations, 2014–18

						Projections
			2014	2015	2016	2017	2018
					(In trillions of won)
Revenue			315.0	335.9	367.9	387.6	409.3
	Tax revenue		205.5	217.9	242.6	261.4	276.1
	Social contributions		59.8	63.0	65.9	69.7	72.7
	Of which: Social security contributions		49.8	53.1	56.9	60.2	62.7
	Other revenue		49.7	55.1	59.4	56.4	60.5
Expenditure			308.8	327.3	339.2	366.5	383.4
	Expense		297.4	315.8	329.1	354.4	370.7
	Net acquisition of nonfinancial assets		11.4	11.4	10.2	12.1	12.6
Net lending (+) / borrowing (-)			6.2	8.6	28.7	21.0	25.9
Overall balance (authorities)			8.5	−0.2	16.9	13.2	18.4
	Less: Social Security Fund balance		38.0	37.8	39.6	43.2	47.1
Overall balance excluding Social Security Funds			−29.5	−38.0	−22.7	−30.0	−28.7
Net acquisition of financial assets			10.3	14.4	47.7	35.0	43.2
	Domestic		10.1	14.1	46.8	34.3	42.3
		Currency and deposits	−0.2	−0.3	−1.0	−0.7	−0.9
		Loans	10.3	14.4	47.7	35.0	43.2
		Others	0.0	0.0	0.0	0.0	0.0
	Foreign		0.2	0.3	1.0	0.7	0.9
		Currency and deposits	0.0	0.0	0.0	0.0	0.0
		Loans	0.2	0.3	1.0	0.7	0.9
	Monetary gold and SDR		0.0	0.0	0.0	0.0	0.0
Net incurrence of liabilities			4.1	5.8	19.1	14.0	17.3
	Domestic		4.1	5.8	19.1	14.0	17.3
	Foreign		0.0	0.0	0.0	0.0	0.0
		Loans	0.0	0.0	0.0	0.0	0.0
					(In percent of GDP)
Revenue			21.2	21.5	22.5	22.4	22.7
	Tax revenue		13.8	13.9	14.8	15.1	15.3
	Social contributions		4.0	4.0	4.0	4.0	4.0
	Of which: Social security contributions		3.4	3.4	3.5	3.5	3.5
	Other revenue		3.3	3.5	3.6	3.3	3.4
Expenditure			20.8	20.9	20.7	21.2	21.2
	Expense		20.0	20.2	20.1	20.5	20.5
	Net acquisition of nonfinancial assets		0.8	0.7	0.6	0.7	0.7
Net lending (+) / borrowing (-)			0.4	0.6	1.7	1.2	1.4
	Less: Policy lending		−0.2	0.6	0.7	0.5	0.4
Overall balance (authorities)			0.6	0.0	1.0	0.8	1.0
	Less: Social Security Fund balance		2.6	2.4	2.4	2.5	2.6
Overall balance excluding Social Security Funds (authorities)			−2.0	−2.4	−1.4	−1.7	−1.6
Memorandum items:
Primary balance (trillion won)			14.2	−4.9	12.9	7.6	12.3
	In percent of GDP		1.0	−0.3	0.8	0.4	0.7
Overall structural balance (trillion won)			9.1	12.2	32.6	23.5	27.3
	In percent of GDP		0.6	0.8	2.0	1.4	1.5
Overall structural primary balance (trillion won)			17.1	−1.3	16.8	10.0	13.7
	In percent of potential GDP		1.2	−0.1	1.0	0.6	0.8
Nominal GDP (trillion won)			1,486.1	1,564.1	1,637.4	1,731.7	1,804.9
Central government debt (trillion won)			503.0	556.5	591.9	613.4	633.8
	In percent of GDP		33.9	35.6	36.1	35.4	35.1
General government debt (trillion won)			533.2	590.5	627.5	651.0	673.0
	In percent of GDP		35.9	37.8	38.3	37.6	37.3

Sources: Ministry of Strategy and Finance; and IMF staff estimates and projections.

View Table

Table 4.

Korea: Statement of Central Government Operations, 2014–18

						Projections
			2014	2015	2016	2017	2018
					(In trillions of won)
Revenue			315.0	335.9	367.9	387.6	409.3
	Tax revenue		205.5	217.9	242.6	261.4	276.1
	Social contributions		59.8	63.0	65.9	69.7	72.7
	Of which: Social security contributions		49.8	53.1	56.9	60.2	62.7
	Other revenue		49.7	55.1	59.4	56.4	60.5
Expenditure			308.8	327.3	339.2	366.5	383.4
	Expense		297.4	315.8	329.1	354.4	370.7
	Net acquisition of nonfinancial assets		11.4	11.4	10.2	12.1	12.6
Net lending (+) / borrowing (-)			6.2	8.6	28.7	21.0	25.9
Overall balance (authorities)			8.5	−0.2	16.9	13.2	18.4
	Less: Social Security Fund balance		38.0	37.8	39.6	43.2	47.1
Overall balance excluding Social Security Funds			−29.5	−38.0	−22.7	−30.0	−28.7
Net acquisition of financial assets			10.3	14.4	47.7	35.0	43.2
	Domestic		10.1	14.1	46.8	34.3	42.3
		Currency and deposits	−0.2	−0.3	−1.0	−0.7	−0.9
		Loans	10.3	14.4	47.7	35.0	43.2
		Others	0.0	0.0	0.0	0.0	0.0
	Foreign		0.2	0.3	1.0	0.7	0.9
		Currency and deposits	0.0	0.0	0.0	0.0	0.0
		Loans	0.2	0.3	1.0	0.7	0.9
	Monetary gold and SDR		0.0	0.0	0.0	0.0	0.0
Net incurrence of liabilities			4.1	5.8	19.1	14.0	17.3
	Domestic		4.1	5.8	19.1	14.0	17.3
	Foreign		0.0	0.0	0.0	0.0	0.0
		Loans	0.0	0.0	0.0	0.0	0.0
					(In percent of GDP)
Revenue			21.2	21.5	22.5	22.4	22.7
	Tax revenue		13.8	13.9	14.8	15.1	15.3
	Social contributions		4.0	4.0	4.0	4.0	4.0
	Of which: Social security contributions		3.4	3.4	3.5	3.5	3.5
	Other revenue		3.3	3.5	3.6	3.3	3.4
Expenditure			20.8	20.9	20.7	21.2	21.2
	Expense		20.0	20.2	20.1	20.5	20.5
	Net acquisition of nonfinancial assets		0.8	0.7	0.6	0.7	0.7
Net lending (+) / borrowing (-)			0.4	0.6	1.7	1.2	1.4
	Less: Policy lending		−0.2	0.6	0.7	0.5	0.4
Overall balance (authorities)			0.6	0.0	1.0	0.8	1.0
	Less: Social Security Fund balance		2.6	2.4	2.4	2.5	2.6
Overall balance excluding Social Security Funds (authorities)			−2.0	−2.4	−1.4	−1.7	−1.6
Memorandum items:
Primary balance (trillion won)			14.2	−4.9	12.9	7.6	12.3
	In percent of GDP		1.0	−0.3	0.8	0.4	0.7
Overall structural balance (trillion won)			9.1	12.2	32.6	23.5	27.3
	In percent of GDP		0.6	0.8	2.0	1.4	1.5
Overall structural primary balance (trillion won)			17.1	−1.3	16.8	10.0	13.7
	In percent of potential GDP		1.2	−0.1	1.0	0.6	0.8
Nominal GDP (trillion won)			1,486.1	1,564.1	1,637.4	1,731.7	1,804.9
Central government debt (trillion won)			503.0	556.5	591.9	613.4	633.8
	In percent of GDP		33.9	35.6	36.1	35.4	35.1
General government debt (trillion won)			533.2	590.5	627.5	651.0	673.0
	In percent of GDP		35.9	37.8	38.3	37.6	37.3

Sources: Ministry of Strategy and Finance; and IMF staff estimates and projections.