IMF on South Korea's 'September Financial Crisis Rumors': "No Possibility... Recovery in Second Half Expected to Be Slower Than Anticipated"

The International Monetary Fund (IMF) annual consultation team visiting South Korea recently assessed the so-called "September crisis theory" raised by some in the financial sector, stating that "there is absolutely no possibility of a financial crisis." However, they forecast that the ripple effects of the Chinese economic downturn caused by the real estate crisis will exert additional downward pressure on the Korean economy next year.

Herald Finger, head of the IMF Korea mission, made these remarks during a briefing and Q&A session with Korean reporters on the 6th following the release of the "2023 Annual Consultation Results."

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is having a video meeting with the IMF annual consultation delegation at the Government Seoul Office Building on the 5th. [Provided by the Ministry of Economy and Finance] [Image source=Yonhap News]

Regarding questions about the "September financial crisis theory," which was raised due to high interest rates and domestic and international uncertainties in Korea's financial sector, Finger explained, "Korea has very sound economic fundamentals," adding, "While there are some vulnerabilities, there is absolutely no possibility that these will lead to a financial crisis."

When asked whether foreign exchange reserves should be increased to stabilize the market, he responded, "The current foreign exchange reserves are at an appropriate level to prepare for potential shocks."

Finger evaluated the Yoon Seok-yeol administration's tight fiscal and monetary policies as a "cautious and appropriate policy mix." He emphasized, "Fiscal policy was very expansionary during the pandemic, and the government debt level relative to GDP is still rising," adding, "In the short term, fiscal and monetary policies should maintain the current tightening stance to curb the increase in government debt and continue to respond to inflation."

He further explained, "The current base interest rate (3.5%) is above the neutral rate," and added, "Going forward, the interest rate path should be determined while maintaining a level above the neutral rate for some time."

Finger predicted that the Korean economy's recovery will gain momentum once price stability becomes firmly established in the second half of the year and the semiconductor industry revives.

However, he added, "Considering that the recovery in the second half may be slower than previously expected, we have revised down Korea's growth forecast for this year from 1.5% to 1.4%."

Regarding the impact of the Chinese economic downturn caused by the real estate crisis on the Korean economy, he explained, "There will be additional downward pressure on the Korean economy in 2024," while noting, "There are also positive factors such as the recent resumption of group tours to China."

Finger viewed the government's decision to limit the fiscal expenditure growth rate to 2.8% in 2024 as a "modest fiscal consolidation." The intention is to maintain a sound fiscal stance that prevents an increase in government debt while adjusting the pace and scale so as not to adversely affect economic growth.

On the tax revenue situation, he forecasted, "There seems to be a tax revenue shortfall due to issues such as economic response, housing market conditions, and changes in the business environment."

Nevertheless, he emphasized, "There does not appear to be a need to cover the tax shortfall with additional spending," adding, "It is necessary to secure additional resources while managing finances according to the current plan."

The annual consultation is a meeting held by the IMF every year to review the overall economy of member countries, including macroeconomics, fiscal, and financial sectors. Based on the results of this consultation, the IMF prepares country reports, which are then approved by the board before being released. In the press release on the annual consultation results, the team stated, "Korea's economic growth rate is expected to reach 1.4% this year and is likely to be higher in the medium term," and "Despite a temporary rebound in inflation in August, inflation has been steadily declining and is expected to approach the authorities' 2% target by the end of 2024." However, they added, "Economic forecasts carry high uncertainty due to the uncertain global economic environment."

The consultation team diagnosed, "Some vulnerabilities have emerged in the financial sector during the housing market slowdown and interest rate hikes, and financial risks have increased, but they appear to be manageable."

They advised, "Continuous efforts are needed to control financial vulnerabilities related to the real estate market and high household debt," and "Measures to ease housing regulations and tax cuts should balance preventing excessive price declines and allowing orderly adjustments."

They also mentioned the need for structural reforms due to population aging, highlighting as priority tasks the establishment of fiscal rules-based systems, pension reform, strengthening labor market flexibility, closing gender gaps, promoting broad innovation, and enhancing climate change response policies.

This content was produced with the assistance of AI translation services.