South Korea should quickly implement additional fiscal stimulus and ease monetary policy further to support an economy that faces downside risks from “weak and volatile external demand”, the International Monetary Fund (IMF) said on Wednesday.
The export driven economy, the fourth-largest in Asia, also faces major structural problems due to its rapidly ageing population, heavy reliance on exports, and lagging productivity especially in the service sector, the IMF said.
“Against this background, macroeconomic policies should be supportive. Speedy implementation of additional fiscal stimulus should be a priority and should be complemented by monetary easing,” said a statement from the IMF mission led by Kalpana Kochhar.
The Bank of Korea’s monetary policy rate currently stands at a record low 1.50 percent but analysts polled by Reuters expect the central bank to cut at least one more time, possibly in July, to shore up tepid growth.
The finance ministry has said it does not plan to draw up an additional budget yet, but some analysts have forecast the government could announce one later this month when they release their policy strategy for the second half of the year.
“Given Korea’s low public debt, there is space to use fiscal policy in a complementary fashion, both to cushion the impact of structural reforms and to incentivize such reforms,” the statement added, saying it agrees with recent government efforts to overhaul some troubled sectors.
Earlier on Wednesday, South Korea said the government and the Bank of Korea will create a 11 trillion won fund to support two state-run banks most exposed to shipping and shipbuilding firms under corporate reconstruction.
The government said it does not have plans yet to directly fund the companies and restructuring efforts should be made by the firms themselves.
Meanwhile, to prevent lower interest rates exacerbating household debt growth, the IMF said authorities should further tighten standards for borrowing.
The mission added for the above changes to be implemented, the exchange rate needs to be flexible and intervention should be limited to addressing disorderly market conditions, in line with its previous statements.