IMF upgrades South Korean economy forecasts

The International Monetary Fund (IMF) on Tuesday upgraded its forecasts for the South Korean economy, saying it saw a slight upside risk for Asia's fourth-largest economy although the economic outlook remains uncertain. The IMF expects the South Korean economy to contract 3 percent this year, compared with its previous forecast of a 4 percent contraction made in May.
It said the economy was seen growing 2.5 percent in 2010, higher than its previous projection of 1.5 percent growth. "The authorities' rapid and comprehensive fiscal, monetary and financial policy response helped limit the depth of the downturn in the wake of the global financial turmoil," the IMF said in a statement.
The upgrade came after recent economic indicators, including May industrial output and June exports data, suggested the economy had turned a corner early this year and was on an accelerating recovery path. That caused speculation the government may end counter-crisis measures, although the authorities have pledged to maintain the monetary easing policy to ensure a recovery is sustained.
The IMF said the country needed to maintain its expansionary policy as the current level of recovery was unlikely to be sutainable otherwise. "Macroeconomic policies are appropriate in supporting the economic recovery. Fiscal stimulus measures have been effective and may need to be maintained in 2010 given the prospects for only a moderate recovery next year," it said.
Echoing the view, Deputy Finance Minister Noh Dae-lae said earlier tjaty the country needed to take a cautious approach in ending its accommodative policy as the economy faced many uncertainties. The head of the country's top research agency said the government should be careful in implementing an exit strategy, although the authorities should prepare for a shift in policy.
"The authorities should prepare an exit policy now, in the same way that fire-fighters check the exits before entering a burning house," Hyun Oh-seok, President of the Korea development Institute (KDI), said at a local seminar. "It requires very prudent strategic thinking to decide when to implement the exit strategy. Historically, many cases show a hasty exit can lead to a prolonged recession, while a belated move can bring about stagnation," he said.
The central bank is widely expected to hold interest rates at a record low of 2.00 percent for a fifth consecutive month on Thursday, but chances for a rise later this year have increased slightly, a Reuters poll showed. South Korea toughened mortgage lending by broadening a tight loan ceiling to the whole of Seoul and neighbouring cities from Tuesday, amid signs of possible asset price bubbles.