IMF cuts Korea growth outlook to 4%

The International Monetary Fund on Tuesday revised down its growth forecast for Korea this year to 4 percent from 4.5 percent in its latest World Economic Outlook, citing decreasing demand for exports. It projected Korea to grow 4.4 percent in 2012.

The IMF lowered the global growth outlook by 0.3 percentage points to 4 percent for this year, expecting slowdown and financial volatility to stay for the time being.“

For emerging Asia, although the slowdown in the United States and euro area will dampen external demand, domestic demand is expected to continue supporting growth,” the international lender said in its September WEO report.

It maintained the 4.5 percent inflation rate for Korea this year and expected prices to grow by 3.5 percent next year.

The IMF lowered its growth forecast for almost all regions. The U.S. received the deepest cut of a full percentage point for a revised rate of 1.5 percent.

The 4 percent projection for this year sits lower than Seoul’s outlook of 4.5 percent. The government has been pushed to lower growth projections as debt in Europe and dismal growth prospects in the U.S. present a setback to exporters and consumer demand.

The IMF advised Korea to let the won appreciate faster but called it a successful case to have paced dangerous inflow of hot money.

“Exchange rate flexibility complemented with macro-prudential tools would reduce the perception of a one-way exchange rate bet and slow the pace of debt-creating capital inflows and the buildup of short-term external liabilities, for example, in Korea,” the report said.

The Korean authorities in the past year adopted a series of policy measures to slow short-term capital inflows, including a tax on foreigner’s income from government bonds. But because of sharp capital flight in the past month, the Bank of Korea is now struggling to control the rapid depreciation of the won. The won closed at 1,148 won against the U.S. dollar to a 9-month low.

By Cynthia J. Kim (cynthiak@heraldcorp.com)