Korea's fundamentals strong, reserves ample, IMF says

The International Monetary Fund (IMF) warned against the overtightening of Bank of Korea monetary policy, citing effects on domestic demand and corrections in the property market.

Krishna Srinivasan, who heads the IMF's Asia and Pacific Department, speaks at a press conference Thursday held during the 56th Asia Development Bank meeting being held in Incheon through Friday. [NEWS1]

The International Monetary Fund warned against Korea's overtightening monetary policy, citing effects on domestic demand and corrections in the property market.

"Policy tradeoffs are shifting, with the growth momentum slowing and tightness in the labor market expected to ease," Krishna Srinivasan, director of the Asia and Pacific Department at the IMF, said during a press conference held at the Asia Development Bank meeting in Incheon Thursday.

Risks of policy overtightening "need to be minimized," he said.

The Bank of Korea "appropriately paused rate hikes" in April and February. He added the central bank should not rush into cutting rates.

The bank's policy rate stands at 3.5 percent compared to the Federal Reserve's 5 percent to 5.25 percent. The next Monetary Policy Board meeting is scheduled to take place on May 25.

"Higher interest rates have played an important role in the ongoing correction of housing prices," which is a factor holding back domestic demand, he added.

The IMF kept the 2023 growth outlook for Korea unchanged from the April forecast of 1.5 percent and 2.4 percent for 2024.

The 2023 growth projection for Korea is lower than the Asian growth forecast of 4.6 percent and the global growth forecast of 2.8 percent.

The IMF cited the chip downcycle and China's service-centered growth and expressed concerns regarding Korea's debt.

Korea needs "buffers" and faces "significant long-term challenges in terms of population" as the country is quickly aging with a significantly decreasing birth rate. Korea broke its own record for the world's lowest fertility rate last year by reaching 0.78.

The economy is projected to pick up in the second half.

China's rapid recovery, following its reopening from Covid-related restrictions, and a broadening from the initial expansion centered on domestic services to manufacturing should increasingly have a positive effect on Korea's exports, Srinivasan added.

Korea's exports fell for the seventh month in a row in April, down 14.2 percent on year. A trade deficit was reported for the 14th consecutive month.

"The biggest driver of Asia's upward growth revision this year is China," Srinivasan said.

The IMF revised China's growth forecast this year to 5.2 percent, up 0.8 percentage points from the October outlook.

"Countries that export final consumption goods to China or those that depend on tourists from China will stand to benefit a lot, while those economies that mainly export raw materials to China are unlikely to receive a strong boost from China's recovery this time around."

Amid rising concerns for Korea's volatile won-dollar exchange rate, the IMF said Korea's "fundamentals are strong" and that its foreign reserve holdings are "more than ample."

Korea's foreign reserves are 25 percent of the country's GDP and are able to cover 2.5 times short-term debt.

The country's foreign reserves came to $426.67 billion at the end of April this year, up 6.1 percent from a month earlier but down from $463.12 billion at the end of 2021.

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