IMF praises Korea, but calls for more spending

The International Monetary Fund delegation gives a briefing on the fund’s assessment of the Korean economy on Tuesday at the government complex in central Seoul. [YONHAP]

International Monetary Fund (IMF) Korea mission chief Tarhan Feyzioglu expressed confidence in the fundamental strength of the Korean economy and in the government’s competence in implementing macroprudential policies.

But he also called for an immediate supplementary budget so the country can meet the government’s growth target of 2.6 to 2.7 percent for the year.

“We genuinely believe the government’s target of 2.6 to 2.7 percent is feasible this year,” Feyzioglu said on Tuesday, “provided that there’s a large supplementary budget.”

He said the supplementary budget should be more than 0.5 percent of the nation’s GDP. Last year, Korea’s GDP grew 2.7 percent from the previous year to 1,782 trillion won ($1.62 trillion).

A half a percent of that would be 8.9 trillion won.

If the government goes with the IMF recommendation, it will be the fourth consecutive year that Korea has issued a supplementary budget.

“I really want to emphasize we’re very positive about Korea’s economy because it’s an incredibly strong economy,” Feyzioglu said, citing the country’s skilled labor force, strong manufacturing base and stable financial system as well as low public debt and ample foreign exchange reserves.

He said the fact that Korea now has a per capita income of over $30,000 is a testament to its achievements, including strong public institutions and prudent macroeconomic management.

But he added Korea is facing “dark clouds” due to weakness in export markets.

“We’ve been hearing negative news for quite some times from all around the world,” the IMF mission chief said. “Korea, being one of the more open economies in the world, is, of course, affected by that.”

While mentioning the slowing of investment, he said it was clear that the economy is on a slowing path.

“That’s why this is an important opportunity for the government to step in and help growth,” Feyzioglu said. “And that’s why we strongly encourage the government to have a supplementary budget issued as early as possible.”

The IMF mission chief said, despite the Korean government’s all-time record budget of 469.6 trillion won this year, there’s still room to spend.

“Yes, we think the government can spend more because the government has collected a lot of revenue in the last three years, more than what they have projected,” Feyzioglu said, adding that the government should be focusing its spending on growth promotion and the expansion of the social safety net.

The IMF mission chief said this supplementary budget should be complemented with an “accommodative” monetary policy from the Korean central bank.

“The Bank of Korea [should] ensure a clear monetary policy stance,” Feyzioglu said, hinting at the need for a lowering in the key interest rates. He also alluded to the possibility of disruptions in the financial markets, including the exodus of foreign investment or rise in household debt.

“It is up to the central bank to decide to change the interest rates,” he added. “It’s a very technical question, and they update their view every day. [But] if the bank lowers the interest rate, we don’t think that would lead to any significant changes to the capital flow. And the main reason is because, at the end of the day, the won is flexible. Korea has a flexible exchange rate. And as long as that’s the case, the interest rate you see in the U.S. and elsewhere and the interest rate in the domestic market will be relatively independent of each other.”

He also complimented the Korean government’s competence, especially with regard to containing risk from rising household debt.

“I want to highlight that macroprudential policies are working very well in Korea,” Feyzioglu said. “In fact, macroprudential policies are working so well in Korea that we use Korea as an example for other countries around the world.”

He said that Korean authorities are incredibly competent and that they understand the possibility of regulatory arbitrage.

“They are constantly modifying their measures to ensure there’s no or very much reduced regulatory arbitrage,” Feyzioglu said. “We believe the current tight macroprudential policies are good [for] contain[ing] household debt.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]