Korean fundamentals are sound but debt is worrying: IMF

Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, speaks at a press conference held in central Seoul on Tuesday to discuss global economy and Korea. [BANK OF KOREA]

Fundamentals will keep the Korean economy afloat while high debt imperils prospects, according to an International Monetary Fund (IMF) official.

The country has strong economic buffers, including a high level of foreign reserves and a credible monetary policy framework, said Krishna Srinivasan, director of IMF’s Asia and Pacific Department, at a press conference held in central Seoul on Tuesday to discuss the global economy and Korea.

Korea’s ratio of net foreign assets stands at around 40 percent of the country’s GDP, and the ratio for its foreign reserves is around 25 percent, he said, adding that Korea is in a “much stronger position than you were before,” compared to the 1997 Asian Financial Crisis and the 2008 global financial crisis.

Korea’s rank in terms of foreign reserves was eighth in the world in September from ninth in a month earlier.

Srinivasan warned that debt has risen sharply in Korea. Government debt stands around 55 percent of its GDP, and the country should make sure the debt level does not break 60 percent.

The IMF projects Korea’s government debt to total 54.1 percent of GDP by the year end. That is more than a 10 percentage point jump from 40.1 percent in 2017.

The ratio of debt to GDP is still lower than that of many advanced economies, but the growth is concerning.

The IMF said the ratio may increase to 57.7 percent by 2027.

Srinivasan added that Korea’s central bank should keep up with efforts to prioritize inflation control, addressing it “head on,” as failing to tame inflation could result in an aggravation of inflationary pressure and hurt the country’s growth.

Though inflation remains above 5 percent in Korea, the director said that inflation in Korea is “coming down” and is expected to gradually return to target levels by 2024 after it peaks this year.

Inflation was 5.6 percent in September, slightly lower than 5.7 percent in August and 6.3 percent a month earlier.

Korea is projected to report around a 4 percent of GDP current account surplus this year, he added.

Korea reported a $3.05 billion current account deficit in August. In the month through September, it the surplus was $22.52 billion, down 60 percent on year.

BY JIN MIN-JI [jin.minji@joongang.co.kr]