Republic of Korea
Briefing Notes for the Launch in Seoul, 6 May 2010
Economic growth and prospects
- When the global financial crisis hit Asia-Pacific towards the end of 2008, GDP growth in the Republic of Korea decelerated markedly. It contracted by 4.2% in the first quarter of 2009, the worst contraction since the Asian financial crisis in 1998. The annual GDP growth dropped from 2.2% in 2008 to 0.2% in 2009, significantly lower than the pre-crisis growth rate of 5.1% in 2007.
- The export sector was badly hit by the drop in demand from developed countries. A sharp fall of about 20% year-on-year in exports was first recorded in November 2008. Exports then continued to slide, resulting in a marked decline of 22% in the first half of the year. Strong recovery was seen towards the end of 2009 but for 2009 as a whole, exports fell by 14%, the first decline since 2001.
- Despite the severe setback in exports, visible trade balance reverted to surplus due to the even sharper decline in import demand. The developments in trade balances were mirrored in current account balances. The Republic of Korea moved from a current account deficit in 2008 to a notable surplus in 2009.
- Signs of economic recovery emerged in the second quarter of 2009- with much smaller declines than in the previous year in both consumption and investment. This was partly the fruit of the government’s fiscal stimulus package. In addition to the $130 billion bank bail-out measures it also expanded the budget to $26 billion – 4% of GDP. Particularly important was the speed of the response- 68% of the funds had been disbursed by the seventh month of 2009.
- The stimulus was also designed to reorient future growth to meet long-term objectives of environmental sustainability. Thus the “Green New Deal Job Creation Plan” for conservation infrastructure and technology aimed at building an every-saving economy while improving the quality of life and the environment. The public stimulus to domestic demand was also supported by a recovery in the stock market.
- The Republic of Korea is expected to resume notable positive growth in 2010, benefitting from stronger growth in China and other key export markets. The GDP is forecast to grow at 5.2% in 2010.
Inflation, monetary policy and exchange rate developments
- Low inflation has enabled policy makers to reinforce their expansionary fiscal policies with lower and more accommodative monetary policy through low interest rates. From October 2008, the Bank of Korea cut its policy rate six times in a row, reducing it by 325 basis points to a record low of 2%.
- While the recovery of the global economy is likely to put upward pressure on the price of commodities including oil, inflation in the Republic of Korea is forecast to remain at 2.8% in 2010.
- The Republic of Korea also had net capital inflows- attributable mainly to the massive inflows of portfolio investment which more than offset the net outflows related to direct investment, derivatives and other investments. In 2009, the country had net portfolio inflows of $51 billion, while there were outflows of $24 billion in 2008. This together with the current account surplus, saw foreign reserve assets rise by over $65 billion in 2009.
- As a consequence of the surplus in the current account, inflows of portfolio capital and better access to foreign credit markets, the Korean won regained value, rising by 18% during 2009.
Fiscal situation and perspectives
- The government’s massive fiscal stimulus package expected to continue throughout 2010, has helped the economy mitigate the impact of the global financial crisis. The establishment of bank recapitalization fund and toxic asset fund cushioned the banking sector during the severe credit crunch and helped stabilize the financial markets. The job creation measures have helped labour market conditions from deteriorating further in 2009.
- However, increased government spending together with declines in tax revenue, will put further pressure on government finances in 2010 which have already been significantly weakened during the financial crisis. The fiscal balance went from a surplus of 1.2% of GDP in 2008 to a deficit of 4.0% in 2009.