SEOUL– South Korea’s economy has “strong” fundamentals and “ample buffers” that could stand against shocks, an International Monetary Fund (IMF) official said Tuesday, shrugging off worries that recently heightening financial market volatility could cause the repeat of such a crisis that the country suffered more than two decades ago.
Still, Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, voiced worries about the country’s high debt level, underlining the importance of a “strong medium-term anchor” in carrying out fiscal policy in a way that would not result in more borrowing.
“Korea has strong economic fundamentals and retains ample buffers and policy space to respond to shocks,” he told reporters during a press conference at the Bank of Korea (BOK) building in Seoul. “You have exchange policy, which is highly flexible … compared to what we have in the past. The monetary policy framework is very credible.”
He specifically cited South Korea’s net foreign assets of around 40 percent of gross domestic product (GDP) and the amount of its foreign reserves nearly three times larger than its short-term debt as reasons for the buffers against shocks.
South Korea’s financial markets have been going through growing volatility in recent months amid worries over accelerating monetary policy in the United States and other major countries and the possibility of the global economy going into a recession.
The BOK’s series of large rate hikes over the past year to tame inflation — a combined 250 basis points — have also added to anxiety that they could excessively cool demand, investment and eventually economic growth.
Recent market swings have led some to worry that the Korean economy might be facing a repeat of an economic crisis reminiscent of the one that happened in the late 1990s, which forced the Seoul government to seek a massive bailout from the IMF.
“You have strong macro metrics. You have strong policy decision frameworks,” he said, adding that South Korea has “protection” that it did not have before.
The IMF official noted the BOK for proactively raising its interest rate, underlining the importance of curbing inflation “head-on” as any failure could mean inflation expectations could get “unanchored.”
He also predicted that the country’s inflation will peak by the end of this year and “gradually” return to the central bank’s target range of 2 percent.
He singled out the country’s high debt levels as a major vulnerability, saying that fiscal policy should be “budget neutral,” thereby trying to avoid causing additional national debt even when spending government funds.
“One area where there are some concerns is the fact that debt levels in Korea have risen over the past several decades,” he said. “It’s important that fiscal policy complements monetary policy, even while providing support to the people who need it most. And it’s very important that fiscal policy has a strong medium term anchor.”
Source: Yonhap News Agency