S. Korea needs to carefully mull timing of exit strategy: report

SEOUL, Dec. 24 (Yonhap) -- South Korea needs to promote financial stabilization
before starting to roll back emergency steps put in place to stem the economic
downturn, the Korea Institute of Finance (KIF) said Thursday.
Amid growing prospects of an economic recovery, debate has heated up over when
and how the central bank should begin to hike the interest rate. The Bank of
Korea (BOK) froze the key rate at a record low of 2 percent for the 10th straight
month in December after cutting 3.25 percentage points between October 2008 and
February.
"South Korea should gauge the timing of its exit from emergency steps after
taking into account the need to support smaller firms. And unlike other major
economies, Korea's housing prices and household debts have not undergone
corrections," the KIF said in a report.
The institute said that as prerequisites for the implementation of an exit
strategy, South Korea needs to beef up financial stability and the private sector
should make a sustainable recovery. Global economic conditions should be also
considered in mulling the timing of an exit, it added.
"To promote financial stabilization, local banks' financial health needs to be
improved and the funding squeeze facing smaller companies should be resolved,"
the KIF said, adding that a hasty exit could deal a blow to small and medium
enterprises given that their loan demand remains high amid still-stagnant cash
flows.
The think tank said that the private sector has not yet fully rebounded on its
own. It said consumer spending is likely to grow 3.1 percent next year, lower
than an average 4.8 percent gain seen between 2005 and 2007.
The Korean economy grew 3.2 percent on-quarter in the third quarter, the fastest
expansion in more than seven years, on improving domestic demand and brisk
exports.
The government recently predicted that the Korean economy will grow 0.2 percent
this year, avoiding a yearly contraction, before jumping 5 percent next year. The
BOK said Korea's gross domestic product, the broadest measure of economic
performance, is forecast to expand 4.6 percent next year.
The government will keep its expansionary macroeconomic policy "for the time
being" but plans to "steadily" roll back stimulus measures, while taking into
account economic and labor market conditions,
sooyeon@yna.co.kr
(END)