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IMF Country Report No. 19/132
REPUBLIC OF KOREA
2019 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF KOREA
May 2019
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 2019 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 May 8, 2019 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 May 8, 2019, following discussions that ended on March 12, 2019, 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 April 22, 2019.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for the Republic of Korea.
The documents listed below have been or will be separately released.
Selected Issues
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.
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© 2019 International Monetary Fund
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REPUBLIC OF KOREA
STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION
April 22, 2019
Key Issues
Context: Korea’s economy has strong fundamentals, but is facing cyclical and structural headwinds. Growth is projected to moderate to around 2.6 percent in 2019, reflecting weaker export growth and investment. Internal demand will be supported by fiscal policy. The output gap is negative and inflation pressures are weak. The current account surplus narrowed, but is expected to remain elevated in 2019. Potential growth will continue its decline, and polarization and inequality are concerns. Labor and product market duality persist. The government is focusing on supporting income, creating jobs, and promoting innovation.
Policy recommendations: Staff recommend an integrated package of macroeconomic, financial and structural policies to support growth, raise potential output, and reduce excess internal and external imbalances, while preserving financial stability.
To support short-term growth and contain risks:
The authorities should provide more fiscal stimulus this year through a supplementary budget of more than 0.5 percent of GDP, while paying attention to fiscal efficiency. Additional measures should include higher spending on targeted safety nets, childcare, training and employment services.
Monetary policy should be eased, as inflation is projected to remain below the target for this year and next, inflationary pressures are weak, signs are emerging that inflation expectations have started to decline, and the output gap is negative.
While risks to financial stability appear well contained, household debt remains a source of vulnerability. Macroprudential policies should remain tight to preserve financial sector resilience.
To promote long-term, inclusive growth and job creation:
Fiscal policy should remain expansionary in the medium-term, focusing on increasing social protection, boosting female labor force participation, and supporting growth-enhancing structural reforms.
Flexicurity should be adopted as a basis for labor market policies.
Public sector job creation should be linked to developing services that cannot be provided by the private sector. The minimum wage increase for next year should be set below labor productivity growth.
Barriers to entry and the protection of incumbents in the product market need to be reduced further.
Approved By
Kenneth Kang, Asia and Pacific Department and Martin Kaufman, Strategy and Policy Review
Discussions were held in Seoul and Sejong during February 27 to March 12, 2019. The staff team included Tarhan Feyzioglu (Mission Chief), Sohrab Rafiq, Niels-Jakob Hansen, Rui Xu, Dongyeol Lee, (all APD), and Signe Krogstrup (RES). Joong Beom Shin (OED) participated in the discussions. Edda Zoli (APD) supported the mission from headquarters. Livia Tolentino and Medha Madhu Nair assisted in preparing this report.
Contents
CONTEXT: CYCLICAL AND STRUCTURAL HEADWINDS TO GROWTH
RECENT ECONOMIC DEVELOPMENTS
OUTLOOK AND RISKS
POLICY DISCUSSION
A. Supporting Short-Term Growth and Containing Risks
B. Promoting Long-Term, Inclusive Growth and Job Creation
STAFF APPRAISAL
BOXES
1. Labor Market Slack and the Output Gap
2. Korea’s Neutral Real Interest Rate
3. Evolution of Macroprudential Policies in Korea
4. Output Gains from Increasing Female Labor Force Participation in Korea
5. Advancing Growth Through Product Market Reforms
FIGURES
1. Recent Economic Developments
2. Recent External Developments
3. Recent Financial Developments
4. Market Conditions, Risk Premia and Financial Stress
5. Minimum Wage Increase
TABLES
1. Selected Economic Indicators, 2017–24
2. Balance of Payments, 2015–20
3. Statement of Central Government Operations, 2017–20
4. Financial Soundness Indicators
ANNEXES
I. External Sector Assessment Matrix (Preliminary)
II. Risk Assessment Matrix
III. Public Debt Sustainability Analysis
IV. External Sector Sustainability
V. Main Recommendations from the 2017 Article IV Consultation and Follow Up
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REPUBLIC OF KOREA
STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
April 22, 2019
Prepared By
Asia and Pacific Department
Contents
FUND RELATIONS
STATISTICAL ISSUES
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Press Release No. 19/161
FOR IMMEDIATE RELEASE
May 13, 2019
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