Mr. Rahul Anand, IMF Mission Chief for Korea, is announcing the results of the IMF-South Korea annual consultation at the Government Complex Seoul on the morning of the November 20, 2024 (Yonhap)
SEOUL, Feb. 7 (Korea Bizwire) — The International Monetary Fund (IMF) has cautioned that downside risks to South Korea’s economy remain significant, citing prolonged political uncertainty as a key factor that could dampen investment and consumer sentiment while heightening financial volatility.
In its 2024 Annual Consultation Report on South Korea, released on February 7, the IMF outlined its assessment of the country’s economic prospects and policy recommendations. The report was based on consultations held last November with the Ministry of Economy and Finance, the Bank of Korea, and other key institutions.
The IMF maintained its forecast that South Korea’s economy will grow 2.0% in 2025, in line with its January 2025 World Economic Outlook (WEO) projection. Growth is expected to be supported by a steady recovery in exports and a gradual rebound in private consumption and investment.
Inflation, which stood at 2.4% in 2024, is projected to stabilize at the central bank’s target of 2.0% in 2025. Meanwhile, the current account surplus, which expanded to 4.2% of GDP in 2024, is expected to narrow slightly to 3.6% due to rising imports driven by consumer demand.
However, the IMF emphasized that uncertainties remain high and that downside risks outweigh upside potential. It identified several key risks, including prolonged domestic political instability, potential shifts in U.S. economic policy under the new administration, weakened global semiconductor demand, sluggish economic performance in major trading partners, and escalating geopolitical tensions.
Particularly, the IMF noted that extended political uncertainty could erode investor confidence, dampen household consumption, and exacerbate financial market volatility.
According to the “December 2024 and Annual Industrial Activity Trends” report released by Statistics Korea on February 3, retail sales, which reflect goods consumption, declined by 2.2%. This marks the largest drop in 21 years, since the 3.2% decline in 2003 during the credit card crisis. The photo shows a noticeably quieter-than-usual Myeongdong shopping district in Seoul. (Yonhap)
Policy Recommendations
To navigate these challenges, the IMF advised South Korea to gradually normalize its monetary policy, considering persistent inflation expectations and financial stability risks. It assessed that the country’s monetary policy remains appropriately managed.
On fiscal policy, the IMF stressed the need for stronger fiscal discipline to address mounting spending pressures from the country’s rapidly aging population. However, it also suggested that if downside risks materialize—leading to economic deceleration and inflation falling below target—the government should consider more accommodative monetary policies and additional fiscal support for vulnerable groups.
The IMF’s remarks were widely interpreted as a recommendation for a potential supplementary budget if economic conditions worsen.
Financial and Structural Stability
A stress test conducted by the IMF found that South Korea’s foreign exchange reserves remain sufficient to withstand external shocks. The country’s expanding net international investment position (NIIP) was also recognized as a crucial factor supporting external stability.
Regarding financial vulnerabilities, the IMF acknowledged potential risks in the housing market and project financing (PF) but assessed them as manageable with continued monitoring and preemptive measures. The organization positively evaluated South Korea’s efforts to strengthen debt-to-service ratio (DSR) regulations, expand housing supply, and ensure a soft landing for the PF sector.
Additionally, the IMF noted that corporate value enhancement measures and foreign exchange market reforms have contributed to improving stock market efficiency and modernizing foreign exchange trading.
It also highlighted that market stabilization measures implemented in October 2022 and December 2024 were effective in preventing severe market disruptions. However, it urged authorities to promptly unwind such measures once normal market conditions are restored.
A view of Seoul from Namsan (Yonhap)
Structural Reforms
The IMF urged South Korea to pursue structural reforms to boost productivity and counter demographic challenges. It recommended easing burdens related to housing, education, and childcare to raise birth rates and promote higher female workforce participation. It also encouraged leveraging skilled foreign workers to offset labor force declines.
Furthermore, the IMF emphasized the need to deregulate small and medium-sized enterprises (SMEs) and the services sector, expand artificial intelligence (AI) applications, and advance productivity-enhancing measures. It also recommended reforms in pension systems, fiscal rules, revenue mobilization, and expenditure efficiency, along with stronger efforts to combat climate change.
As South Korea navigates a complex economic landscape, the IMF’s assessment underscores both the challenges and the need for proactive and balanced policy responses to sustain long-term growth and financial stability.
M. H. Lee (mhlee@koreabizwire.com)
