SEOUL-- South Korea is not likely to suffer a crisis as in late 1990s due to its strong fundamentals, a high-ranking official from the International Monetary Fund (IMF) said Tuesday, with its economy set to gather ground later in 2023 on "positive spillovers" from China.
IMF Deputy Managing Director Gita Gopinath said Asia's No. 4 economy is capable of dealing with adverse events that may come up.
"We see no risk of an economic crisis for South Korea, of anything like 1997-1998 crisis," Gopinath said during an interview with Yonhap News Agency in Seoul. "Korea has strong fundamentals. It has strong policy frameworks, monetary and fiscal policies. Unlike during the time of the previous crisis, foreign exchange reserves are much stronger, set around 25 percent of GDP."
Gopinath, however, said the IMF nevertheless lowered its economic outlook on South Korea for this year, as high interest rates are likely to impact consumption throughout 2023.
Earlier in the day, the IMF slashed its 2023 economic growth outlook for South Korea to 1.7 percent from the growth forecast of 2 percent that the Washington-based organization made in October. The IMF also cut next year's growth estimate for South Korea to 2.6 percent from the previous forecast of 2.7 percent.
"We've seen Korea's trade balance deteriorate, as external demand weakens," Gopinath added. "The slowdown in the housing sector ... these are the areas where we would see some weakness."
South Korea's exports fell 2.7 percent on-year in the first 20 days of January, the Korea Customs Service said earlier this month, due mainly to weak semiconductor shipments.
Despite the weaker outlook, Gopinath echoed the view made by the finance ministry that the South Korean economy will perform better in the second half of 2023.
"We will see signs of growth recovering, also because of the recovery in China. So we have the positive spillovers from China's recovery on Korea," she said. China is South Korea's biggest trading partner.
In terms of the policy rate, Gopinath did not suggest a desirable rate for the South Korean central bank, saying it will depend on incoming data such as inflation.
"I think you have to weigh the different considerations relatively in terms of the impact on inflation versus on financial stability and economic activity, to decide on where to go with the policy rate. So I believe it has to be data dependent," she said.
In January, the central bank raised the benchmark seven-day repo rate from 3.25 percent to 3.5 percent, the highest level since 2008. It was the seventh straight rate increase since April last year, the longest span of tightening.
Gopinath also said South Korea should keep in mind that diversifying trade partners will help in building resilience in its supply chain, amid the growing concerns over a fragmentation of global trade.
"Especially after Russia's invasion of Ukraine, many countries are turning inwards, and realigning their trading partners," Gopinath said, saying the IMF is advising countries to be "very careful" not to become protectionist.
Touching on the latest slump in the property market amid high borrowing costs, Gopinath said the latest correction may actually be a "useful adjustment."
"So real estate prices went up quite sharply in the recent past, and in our view, some of that reflects overvaluation of real estate prices," she said. "What is important is to make sure that any support (by the government for the property market) is temporary and is targeted, and that it doesn't lead to moral hazard in the markets."
During her meeting with Finance Minister Choo Kyung-ho earlier in the day, Gopinath said it is positive that South Korea maintains consistent financial and monetary policies, while advising the country to cope with its changing population structures amid low birth rates, the ministry said.
Source: Yonhap News Agency