SEOUL, Dec. 27 (Yonhap) – South Korea needs to revive its economic dynamics to achieve sustainable growth, as it may face a drop in growth potential due to the rapidly aging population, a director of the International Monetary Fund (IMF) said Sunday.
“The Bank of Korea (BOK) estimated that South Korea’s growth potential is around 3 to 3.2 percent, but it will likely drop to below 3 percent in the long-term due to structural challenges such as the aging population,” Rhee Chang-yong, director of the IMF’s Asia and Pacific Department, said in an interview with Yonhap News Agency.
He said the country’s fundamentals are strong enough to overcome the current financial difficulties, citing a recent upgrade of the sovereign credit rating and sound fiscal policies.
Earlier this month, global rating agency Moody’s raised South Korea’s sovereign credit rating to Aa2, the third highest grade on its ratings table and higher than those of Japan and China.
But Rhee noted that a possible decline in the growth potential and dynamics of Asia’s fourth-largest economy will be the most pressing matter to be taken care of.
The IMF revised down South Korea’s growth estimate for next year to3.2 percent from 3.5 percent, while the BOK also lowered the figure to 3.2 percent.
The country has also been struggling with a low birth rate and rapidly aging population, which is widely expected to weigh heavily on economic growth.
“Many foreign investors say that South Korea’s growth rate has been on a decline from 3 percent,” said Rhee. “It has become a safer investment place, but less interesting and less dynamic.”
According to government data, Koreans aged 65 or older accounted for 12.2 percent of the total population of some 50 million in 2014, with the ratio to shoot up to over 30 percent by 2040.
Moreover, the number of economically active people aged 15-64 is forecast to begin diminishing from next year.
Against the backdrop, the Korea-born IMF director called for swift structural reform to keep up with the demographic change and to prop up economic growth.
“In order to prevent chronic low growth, South Korea should go on with structural reform of childbirth, healthcare, education and the service sector in the mid- and long-term,” said Rhee. “Many worry that South Korea will go down Japan’s path if it misses the timing of reform.”
He warned that South Korea would experience a drop in growth potential in 10 to 20 years, referring to Japan’s growth potential of 0.5 percent.’