(Contributed Story) IMF predicts Korea's growth to be 'substantially negative'

SEOUL, Feb. 2 (Yonhap) -- The following is the statement contributed exclusively
to Yonhap News Agency by Anoop Singh, director of the IMF's Asia and Pacific
Department. He predicted the South Korean economy will likely post "substantially
negative" growth this year amid a global crisis but remained upbeat, forecasting
that it will rebound from the second half and return to its growth potential in
2010.

Korea, navigating through the global headwinds

As is now well understood, the global economy is in the midst of its most
difficult period in the post-war period. Financial markets have come under
increasingly acute strain over the past year or so, as financial systems in the
United States and other advanced economies fell into deep distress. In the
advanced economies, the financial crisis also severely weakened consumer and
business confidence. As a result, in a closely integrated world, countries across
the globe have come under intense pressures, with exports and industrial
production plummeting, as external demand fell and credit flows were seriously
impeded. And this ongoing slowdown in economic activity is likely to have further
adverse consequences for financial institutions, including through a rise in bad
loans.
Given its open economy, it is not surprising that Korea is being severely
affected by this global crisis. Indeed, we have already seen a sharp slowdown in
growth in the fourth quarter. But we remain fundamentally optimistic about
Korea???s recovery and its medium term prospects. The country???s much improved
economic fundamentals have allowed it to mount a vigorous countercyclical
response to the external crisis that should help buffer the domestic economy and
leave Korea well-placed to resume solid growth once the global economy begins to
recover.
According to the most recent IMF World Economic Outlook update, the global
economy is projected to grow by just ½ percent in 2009, the slowest pace since
World War II. Expressed at market exchange rates, global growth will be negative
in 2009. Helped by continued policy actions to ease credit strains and
expansionary monetary and fiscal policies across a wide range of countries, the
global economy is expected to experience a gradual recovery in 2010. However, the
uncertainty surrounding this outlook is unusually large, with the risk that the
pernicious feedback loop between real activity and financial markets will
intensify unless financial strains are forcefully addressed.
The Korean economy is one of the most globally integrated in the world, and while
this integration has been a key factor behind Korea???s remarkable economic
history, there is little doubt that the country is now particularly affected by
the global crisis. Korean financial markets were hit particularly hard by the
external shocks during October and November, as both domestic and foreign
exchange liquidity tightened for banks with large wholesale financing
requirements, and foreign investors retrenched from very liquid markets such as
Korea. According to preliminary data, the economy contracted by 5.6 percent in
the last quarter of 2008, over the previous quarter. Exports declined sharply
with plummeting global demand, and this fed through to weaker consumption and
investment as well.
Although the carryover effects of the very weak fourth quarter of 2008 mean that
the headline growth number for 2009 will be substantially negative, we project
that the economy should begin to recover during the second half of this year. A
clearer picture for the performance of the economy this year can be seen by the
fact that growth in the last quarter of 2009 compared with the last quarter of
2008 is expected to be positive 1 percent. This is broadly in line with projected
global growth and above growth for all major advanced economies. Indeed, the
Korean economy should return to potential in 2010.
What underpins the projected recovery in Korea? First, fundamentals are strong --
the banking system is well capitalized, nonperforming loans are still low, and
balance sheets of large corporates are generally healthy, and second, Korean
policymakers have taken a comprehensive and forward-looking approach to the
global turmoil to maintain these fundamentals. With inflation well under control,
monetary policy has appropriately been loosened, while the 2009 budget
incorporates important fiscal stimulus. The government has been proactive in
ensuring that liquidity in the banking system remains ample despite the
tightening of external financing conditions, and has undertaken numerous
initiatives to bolster the financial and corporates sectors and to avoid the
sharp deleveraging process seen elsewhere, such as through bilateral currency
swap arrangements with the U.S., Japan and China.
The coming year will undoubtedly be a difficult one for the global economy and
Korea. There is considerable uncertainty about precisely when global growth will
begin to recover, but once it does -- most likely by the second half of this year
-- Korea appears well positioned for a solid recovery.
kokobj@yna.co.kr
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