The International Monetary Fund on Tuesday cut Korea's economic growth forecast by 0.25 percentage points. In a press release after its annual meeting with Korean officials on Tuesday afternoon, the IMF said the country's growth this year is likely to drop due to "overall unfavorable global developments." The IMF's previous forecast was 3.5 percent.
While Korea's direct exposure to Europe is not high, if weaknesses there spill over to the U.S. and China, the impact on Korea could be substantial, it said.
The IMF added, "Despite substantial progress in strengthening the financial system, some potential vulnerabilities remain. Korea is one of the most open economies in Asia and is highly exposed to volatile capital flows and foreign currency funding risks."
However, the IMF praised the country's economic competitiveness. "Korea is now an advanced industrial economy. Maintaining high potential growth will become more challenging over time and will require improved labor markets and higher productivity, especially in the services sector… Improving competition in the education and health sectors, and expediting the bank-led restructuring of small- and medium-sized enterprises will enhance service sector productivity, as will deregulation measures being implemented under the free-trade agreements with the U.S. and EU."
Turning to monetary policy, the IMF advised that if the global economy recovers, "some increase in the policy rate" may be needed in early 2013 to maintain inflation within the target range.