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IMF Country Report No. 21/64
REPUBLIC OF KOREA
2021 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; STAFF STATEMENT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF KOREA
March 2021
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 2021 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 March 17, 2021 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 March 17, 2021, following discussions that ended on January 26, 2021 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 March 2, 2021.
An Informational Annex prepared by the IMF staff.
A Staff Statement updating information on recent developments.
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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REPUBLIC OF KOREA
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION
March 2, 2021
Key Issues
Context. Korea entered the COVID-19 pandemic with sound macroeconomic fundamentals and a resilient financial system. The initial outbreak led to a sharp decline in economic activity and employment and generated substantial economic slack. With the help of an effective COVID-19 containment strategy and comprehensive economic policy response, the overall impact was smaller than in peers, with real GDP growth in 2020 of -1.0 percent. The economy is projected to grow 3.4 percent in 2021, albeit at varying speeds across sectors, and with a high degree of uncertainty centered on the speed of normalization in the COVID situation. Public debt has risen and deficits have widened but remain at manageable levels. Credit continues to grow rapidly, financial markets have normalized quickly, and the financial sector has remained relatively sound to date despite the pandemic. The authorities are pursuing greener and more digital growth, along with a stronger social safety net, through the Korean New Deal.
Main policy recommendations. More accommodative fiscal and monetary policy would help the economy normalize faster, sustain affected small businesses, and bring discouraged workers back into the labor force.
Fiscal policy should be the main instrument to provide support by taking a modestly positive or at least neutral stance in 2021, which could be achieved by raising targeted transfers to affected workers and firms, and accelerating public investment.
Gradual fiscal consolidation can be undertaken once the recovery takes hold. Introducing a rules-based fiscal framework would provide a long-term anchor for the public finances.
Additional monetary policy support would help underpin the recovery and bring inflation closer to the BOK’s target more quickly, while financial stability risks can be addressed through macroprudential policies. These appear appropriately set at present but can be tightened further if household credit continues to rise sharply.
Maintaining credit support measures as planned will help avoid a premature tightening of credit, especially for SMEs. As the economy recovers, the focus of support should shift from liquidity provision to targeted measures that promote corporate restructuring and solvency.
The Korean New Deal rightly seeks to develop new growth drivers and increase inclusiveness. Complementary reforms to reduce entry barriers, stimulate innovation, and lower labor market rigidities can provide a further boost to potential growth.
Approved By
Kenneth Kang and Martin Kaufman
Virtual consultations took place from January 12–26, 2021. The mission team was Andreas Bauer (head), Si Guo, Sung Jin Kim, Sohrab Rafiq, and Andrew Swiston (all APD). Maksym Markevych (LEG), Ian Parry (FAD), and Anjum Rosha (LEG) participated in some meetings. Chang Huh, Byunghee Yoo, and Jinhyuk Yoo (all OED) joined the virtual meetings. Paola Castillo and Livia Tolentino contributed to the preparation of this report.
Contents
PRE-COVID-19 CONTEXT
RECENT ECONOMIC DEVELOPMENTS
OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Fiscal Policy
B. Monetary Policy and the FX Market
C. Financial Sector Policy
D. Structural Policy
STAFF APPRAISAL
BOXES
1. Korea’s Health and Economic Response to the COVID-19 Outbreak
2. The Korean New Deal
FIGURES
1. Activity, Employment, and Inflation
2. Policy Response to the COVID-19 Pandemic
3. Financial Conditions Indicators
4. Leverage Cycle Dynamics
5. Corporate Balance Sheet Performance and Risk Indicators
6. External Sector Developments
TABLES
1. Selected Economic Indicators, 2018–26
2. Balance of Payments, 2018–26
3. Statement of Central Government Operations, 2018–26
4. Financial Soundness Indicators
ANNEXES
I. Follow-Up on Past IMF Recommendations
II. Key Economic Policies in Response to COVID-19
III. External Stability Assessment
IV. Risk Assessment Matrix
V. Public Debt Sustainability Analysis
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REPUBLIC OF KOREA
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION —INFORMATIONAL ANNEX
March 2, 2021
Prepared By
Asia and Pacific Department
Contents
FUND RELATIONS
STATISTICAL ISSUES
