The top policy priority for the Korean economy, either in the short term or the long term, is to support domestic demand, notably household income. That’s the advice that the International Monetary Fund has given to the Korean government after concluding its annual consultation last week.
Overall, the IMF has given a positive assessment of the Korean economy. It said Korea had fared well in the summer’s financial market turmoil, which was triggered by the U.S. Fed’s move to start tapering its stimulus measures.
While many emerging economies suffered body blows, Korea’s strong fundamentals ― low inflation, a sound fiscal position and ample foreign exchange reserves ― rather helped it emerge as “a safe haven of sorts” for risk-averse investors.
Now, the fund says the Korean economy is well-positioned to benefit from the global recovery, with GDP growth expected to rebound to 2.8 percent this year and strengthen further to 3.7 percent next year.
The recovery will be led largely by export growth. IMF analysts say Korea’s exports will post robust growth despite some appreciation of its currency, as Korean exporters’ sensitivity to exchange rate movements has fallen significantly as a result of their improved competitiveness.
In contrast, domestic demand remains relatively weak despite a supplementary budget and the Bank of Korea’s policy rate cut in the spring. Absent reforms, the IMF warns, it will remain so, imposing a serious drag on growth.
Therefore, it advised the Korean government to rebalance the economy toward domestic demand, which would help Korea sustain economic growth and improve the living standards of its population.
In fact, this is not the first time for the IMF to offer such advice. In recent years, it has consistently recommended that Korea shift its policy focus to domestic demand to diversify its sources of growth and strengthen its growth potential.
Yet this year, the IMF mission pointedly emphasized the need to increase household income. The stress is justified as the household debt burden continues to grow due to slow income growth.
According to the central bank, Korea’s household debt totaled 980 trillion won ($921.1 billion) in June, up 17 trillion won from March. While the magnitude of the debt itself is cause for concern, what makes it all the more menacing is the ever worsening capacity of households to pay back their debts.
The bank’s data show that the ratio of household debt to disposable income reached a record 137 percent in June, up from 136 percent in December. As long as household debt grows faster than disposable income, domestic demand will remain depressed.
The IMF recommends a set of policies to boost household income and enhance Korea’s growth potential. They include increasing social spending, boosting women and youth participation in the workforce, reducing the gap in wage and social protection between non-regular and regular workers, and deregulating such service segments as network services, health and education.
On top of these measures, the government needs to alleviate the excessive burdens that middle-income households have taken on to purchase a home and educate their children.
As mortgages account for a large chunk of household debt, helping families reduce their monthly housing payments would go a long way toward expanding domestic demand. For this, it is necessary to enable homeowners to refinance into lower-cost, longer-term mortgages.
