S. Korea`s economy to grow 3.6 pct in 2010 after shrinking 1 pct this year: IMF

By Hwang Doo-hyong
WASHINGTON, Oct. 1 (Yonhap) -- South Korea's economy will pick up 3.6 percent
next year, after shrinking 1 percent this year, due to robust exports and
undaunted domestic demand helped by economic stimuli to weather the global
recession, the International Monetary Fund (IMF) said Thursday.
The growth outlook is a major upward revision from the IMF's prediction in July
of 2.5 percent growth next year and a 3 percent contraction this year.
The rosier outlook still lags behind the 4 percent growth for next year that
South Korean President Lee Myung-bak forecast last week in Pittsburgh during the
third summit of the 20 most advanced economies.
Some South Korean and foreign financial institutions forecast that South Korea's
growth will turn positive this year and reach 6 percent next year.
South Korea's stock value and foreign exchange reserves have recovered to
pre-recession levels, with the reserves hitting a 13-month high in August of
US$245 billion, helped by a burgeoning trade surplus. The Seoul bourse is also
hovering over the 1,700 mark, boosted by foreign investors.
In April, the IMF predicted South Korea's economy would decline 4 percent this
year before rebounding to post a modest 1.5 percent growth figure next year.
The IMF, meanwhile, predicted the global economy will decline 1.1 percent this
year, down from its July prediction of 0.3 percent growth. However, it greatly
raised next year's growth rate to 3.1 percent from its earlier prediction of 0.6
percent.
The lending agency attributes the faster-than-expected global recovery to the
strong performance by Asian economies, notably China and India, which are
expected to register growth rates of 8.5 percent and 5.4 percent, respectively,
this year.
"The global economy appears to be expanding again, pulled up by the strong
performance of Asian economies and stabilization or modest recovery elsewhere,"
the IMF said, but added, "The current rebound will be sluggish, credit
constrained, and, for quite some time, jobless."
Advanced economies will likely shrink 3.4 percent this year before picking up a
modest 1.3 percent next year, with the U.S. economy contracting 2.7 percent this
year and expanding 1.5 percent next year. Japan will likely undergo a 5.4 percent
contraction this year and 1.7 percent growth next year.
Emerging and developing economies are forecast to grow 1.7 percent this year and
5.1 percent next year.
The IMF attributed the strong Asian performance to "expansionary fiscal and
monetary policy which has been very aggressive in some countries, a rebound in
financial markets and capital inflows which eased financing constraints for small
export enterprises and improved consumer, and business confidence and the growth
impulse for industry following large inventory adjustments."
The lending agency warned against complacency, saying an early exit from
expansionary fiscal and eased monetary policies may trigger a double dip
recession.
"Premature exit from accommodative monetary and fiscal policies, possibly driven
by rising concerns about government intervention and unconventional action by
central banks, seems to be a significant risk because the policy-induced rebound
could be mistaken for the beginning of the strong recovery," it said.
"Notwithstanding already large deficits and high debt in many countries, fiscal
stimulus needs to be sustained until the recovery is on a firm footing and may
need to be amplified or extended beyond current plans if downside risks to growth
materialize."
In the mid-term, governments are advised to reduce deficits for sustainable growth.
"Governments should thus stand ready to roll out new initiatives as necessary,"
the IMF said. "At the same time, they need to commit large reductions in deficits
over the medium term and must stop addressing mounting long-term fiscal
challenges by advancing reforms to put public finances on a major sustainable
path."
Also recommended was financial reform.
"Completing financial sector repair and reforming prudential frameworks are
indispensable for a return to sustained growth over the medium term," it said.
"As financial markets become deeper and more robust, they can offer stable saving
and investment vehicles, which would reduce reliance on foreign financing and
make household savings a more important funding base for the financial sector."
The IMF also advised Asian developing economies to adopt more flexible exchange
regimes to help rebalance growth, apparently targeting China, which has often
been under criticism for maintaining its currency rate at what the U.S. says was
a much lower level than its value.
South Korea is also said to have benefited from its weak currency in the rapid
recovery, although the currency hit a one-year high of 1,178 won to the U.S.
dollar Wednesday, buttressed by consumer confidence, continued current account
surpluses and foreign buying on hopes of economic recovery.
"Appreciating exchange rates in economies where there is productivity growth
would imply an increase in real household incomes as important prices decline,
thereby strengthening domestic demand, and would also send a signal to businesses
to shift supply toward the domestic sector," it said. "More flexible exchange
rates would also allow Asian economies to develop monetary policy into an
independent tool for macroeconomic management, which would help buffer the
economic impact of external and domestic shocks."
hdh@yna.co.kr
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