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The following OECD assessment and recommendations summarise chapter 1 of the Economic Survey of Korea published on 17 December 2008.
An adverse world economic environment has slowed growth and boosted inflation…
The Korean economy has faced a number of shocks in 2008, including higher commodity prices, slowing world trade and the global financial crisis. The terms-of-trade shock – Korea is the world’s fifth-largest oil importer – weakened the won and heightened inflationary pressures, which have squeezed household income and corporate profits, damping private consumption and investment. In addition, housing market policies contributed to a 5% decline in residential investment over the past year, while the deceleration in world trade took a toll on Korean export growth. With weaker domestic demand and exports, output growth fell from 5% in 2006 07 to 3% in the first three quarters of 2008, at a seasonally-adjusted annual rate. Intensified financial turbulence in September 2008 has further dimmed the economic outlook by accelerating the depreciation of the won and tightening credit conditions. The timing of the rebound depends on an improvement in the world economy, which may not occur until well into 2009. In that event, economic growth is projected at around 3% on a year-average basis in 2009 before rising back to around 4% in 2010.
Inflation targets and outcomes
Year-on-year percentage changes
1. Since 2004, the target has been a medium-term objective and, in 2007, it was changed from core to overall CPI.
Source: Bank of Korea.
Short-term economic outlook for Korea1
Percentage changes, volume (2000 prices)
…creating a difficult task for macroeconomic policies
Faced with a marked slowdown, the government is implementing a supplementary budget and tax rebates totalling almost 1% of GDP, to be followed by cuts in personal and corporate income tax rates in 2009 10. In November, the government submitted revisions to the 2009 budget proposal, adding further stimulus measures. Concerned about high inflation, the Bank of Korea hiked interest rates by ¼ per cent in August 2008, but then reversed course in October as the global financial crisis worsened, cutting rates by a cumulative 125 basis points by early November. The government announced in October that it would guarantee banks’ foreign borrowing up to a total of $100 billion. In addition, the authorities intervened in the foreign exchange market in July to stabilise the won and arranged a $30 billion currency swap with the US Federal Reserve in October. Between June and October 2008, Korea’s foreign exchange reserves fell by $46 billion, to $212 billion. The won continued to depreciate, falling by 26% in trade-weighted terms between early July and the end of November. Foreign exchange market intervention is likely to be costly and ineffective in the face of global financial turbulence that is driving the won’s depreciation and should therefore be limited to smoothing operations. This would also limit any further decline in foreign exchange reserves, which provide a cushion against Korea’s short-term foreign debt, which soared from $66 billion at the end of 2005 to $189 billion in September 2008.
Exchange rate trends¹
1. A rise indicates an appreciation of the won.
2. Calculated vis-à-vis 41 trading partners.
3. The rate shown for the fourth quarter is the average of October and November.
Source: OECD Economic Outlook Database and Bank of Korea.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. A Korean version is also available (pdf format). It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Korea 2008 is available from:
For further information please contact the Korea Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Randall S. Jones and Masahiko Tsutsumi under the supervision of Vincent Koen. Research assistance was provided by Lutécia Daniel.