S. Korea Growth Estimate Cut by IMF as Europe Caps Exports

South Korea should continue to support the economy with government spending and low interest rates as growth is set to trail earlier forecasts, the International Monetary Fund said.

Korean growth will be 3 percent this year, down from a June forecast of 3.25 percent, the IMF said in a report today. The Fund projects around 4 percent growth next year. The Bank of Korea on July 13 forecast 3 percent growth for 2012 and 3.8 percent for 2013.

The European debt crisis is crimping Korea’s exports, weakening economic growth. The IMF will probably lower its Korea forecast further when it cuts the global growth outlook in a publication due Oct. 9, mission chief Khor Hoe Ee said on a conference call today.

“For now, maintaining the currently accommodative monetary policy stance is appropriate given global weakness and heightened uncertainties,” IMF staff said in an annual assessment of the country’s economy and policies. “Fiscal policy should continue to support growth within the constraints of the current budget.”

The central bank unexpectedly cut borrowing costs in July and has since held rates unchanged, opting to preserve policy room in the event of a deeper global slowdown. The government on Sept. 10 announced economic support measures worth $5.2 billion, including spending and tax benefits to stimulate domestic demand and investment.

Downside Risks

“There’s certainly scope to provide more support for the economy but precisely whether to cut or not is really a decision for the central bank to make,” Khor, also an assistant director in the Asia and Pacific Department, said on the call when asked whether further interest cuts are needed.

In its article IV report, the IMF said Asia’s fourth- largest economy has “sufficient policy space” to respond to severe downside risks, especially on the fiscal front. In a baseline scenario of gradual economic recovery, the Bank of Korea should raise interest rates in 2013, the IMF said.

Europe’s debt crisis is capping South Korea’s exports, which fell 6.2 percent in August from a year earlier and the nation’s economy expanded 2.3 percent in the second quarter, the slowest pace since 2009. Inflation moderated to a 12-year-low of 1.2 percent in August.

Asked whether actions by central banks from the U.S. to Japan to buoy their economies may induce a surge in capital inflows for Korea and the need for capital controls, Khor told reporters that there are pros and cons to the situation and that the country’s financial system is more resilient than in the past to withstand such flows if they were to happen.

On the positive side, “the easing of market policy in the U.S. and other places will help to support growth in the U.S. and other countries and this will in turn help strengthen” global demand, Khor said.

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editors responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net

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