1KOREA2021001

IMF Country Report No.
21/64
REPUBLIC OF KOREA
2021 ARTICLE IV CONSULTATION—PRESS RELEASE;
March 2021 STAFF REPORT; STAFF STATEMENT; AND STATEMENT
BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF
KOREA
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions
with members, usually every year. In the context of the 2021 Article IV consultation with
the Republic of Korea, the following documents have been released and are included in
this package:
• A Press Release summarizing the views of the Executive Board as expressed during its
March 17, 2021 consideration of the staff report that concluded the Article IV
consultation with the Republic of Korea.
• The Staff Report prepared by a staff team of the IMF for the Executive Board’s
consideration on March 17, 2021, following discussions that ended on January 26,
2021 with the officials of the Republic of Korea on economic developments and
policies. Based on information available at the time of these discussions, the staff
report was completed on March 2, 2021.
• An Informational Annex prepared by the IMF staff.
• A Staff Statement updating information on recent developments.
• A Statement by the Executive Director for the Republic of Korea.
The documents listed below have been or will be separately released.
Selected Issues
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premature disclosure of the authorities’ policy intentions in published staff reports and
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© 2021 International Monetary Fund
PR21/81
IMF Executive Board Concludes 2021 Article IV Consultation

with Republic of Korea
FOR IMMEDIATE RELEASE
Washington, DC – March 25, 2021: The Executive Board of the International Monetary Fund
(IMF) concluded the Article IV consultation1 with the Republic of Korea on March 17, 2021.
The Korean economy has weathered the COVID-19 pandemic comparatively well, supported
by its sound macroeconomic fundamentals, a timely and effective public health response, and
the deployment of a comprehensive set of fiscal, monetary, and financial measures. As a
result, Korea’s economic contraction in 2020 was smaller than in most other advanced
economies, with real GDP declining by 1 percent.
Activity has been recovering since Q2-2020, supported by a rebound in exports—especially of

high-tech products—and resilient investment in machinery and equipment. By contrast,
services activity and consumption have been sluggish, and employment is still significantly
below its pre-COVID level. With substantial COVID-19 response measures, the overall fiscal
def icit for 2020 widened to an estimated 4.1 percent of GDP. Credit growth has remained
strong, financial markets have normalized quickly, and financial sector soundness indicators
have shown relatively little impact from the pandemic to date. Inflation remained below
1 percent despite recent rises in food and fuel prices. The current account balance increased
to 4.6 percent of GDP in 2020, from 3.6 percent in 2019, on strong tech exports and a
narrowing of the services deficit due to travel restrictions.
The outlook is for a recovery in 2021 with real GDP projected to grow 3.6 percent, supported
by a gradual normalization of COVID-related factors and stronger external demand. This
incorporates the impact of the recently proposed supplementary budget, raising the forecast
f rom the previous 3.4 percent when the staff report was finalized.
With output and employment below potential, inflation is forecast at 1.2 percent in 2021
despite higher oil prices, which are projected to contribute to a narrowing of the current
account surplus to 3.8 percent of GDP. Uncertainty surrounding the outlook remains high,
mostly hinging on COVID-related risks in both directions. Renewed surges in infections and
slower vaccinations—either domestically or abroad—are the principal downside risk to the
economy, while faster-than-expected virus containment and continued resilient external
demand are the main upside risks.
1
Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial information, and discusses with officials the country's economic developments
and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
Executive Board Assessment 2
Executive Directors commended Korea’s effective COVID-19 containment measures and

comprehensive economic policy response, which, along with sound macroeconomic
f undamentals, have allowed the economy to weather the pandemic shock comparatively well
and should help minimize the risks of long-term economic scarring. They were encouraged by
the ongoing economic recovery, while observing that the outlook is subject to high uncertainty.
Going forward, Directors underscored the need for continued supportive macroeconomic
policies to help the economy normalize faster, safeguard financial stability, and foster greener
and more inclusive growth.
Directors agreed that fiscal policy should remain expansionary over the near term. They
welcomed the authorities’ recent announcement of a proposed supplementary budget, which
would enable a positive fiscal impulse for the current year by raising transfers targeted to
af f ected workers and firms, and provide resources for COVID-19 vaccinations. They observed
that this expansion could be offset by gradual consolidation in subsequent years, anchored on
the proposed rules-based fiscal framework. Directors noted that an independent council to
monitor and review implementation of the proposed fiscal rule would enhance its credibility.
Directors viewed the monetary easing in 2020 as appropriate and agreed that monetary policy
should remain accommodative. Most Directors considered the current monetary stance as
broadly appropriate given the need to balance macroeconomic conditions and financial
stability risks, while a f ew saw merit in additional easing to help underpin the recovery and
bring inflation closer to target.
Directors welcomed the steps taken following the COVID outbreak to sustain credit flows,
especially to small businesses, and agreed that credit support programs should be maintained
until the economy recovers more broadly.
Directors viewed the financial system as resilient overall, supported by a macroprudential

policy stance that is appropriate given the level of risks. They concurred that while several
f actors mitigate financial stability risks from high household debt, the introduction of a sectoral
capital buffer on household exposures would further strengthen the resilience of banks to
potential losses. Directors also encouraged the authorities to be prepared to tighten prudential
policies further in the event of continued rapid household credit growth, and to closely monitor
pressures in the real estate market. They welcomed recent measures to strengthen resilience
among non-bank financial institutions.
Directors were encouraged by the authorities’ strategy to develop new growth drivers through
the Korean New Deal, which would facilitate a digital, greener, and more inclusive economy.
They encouraged the authorities to take complementary steps to boost potential growth by
reducing entry barriers, fostering innovation, and tackling labor market rigidities, particularly to
support women and youth. Welcoming Korea’s ambitious climate change mitigation
objectives, Directors underscored the importance of carbon pricing to provide robust
incentives for green investment.
2
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:
http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
Table 1. Korea: Selected Economic Indicators, 2018-211
Estimates Projections
2018 2019 2020 2021
Real GDP (percent change) 2.9 2.0 -1.0 3.4
Total domestic demand 2.0 1.2 -1.3 1.9
Final domestic demand 1.7 1.1 -0.8 1.9
Consumption 3.7 2.9 -2.4 1.2
Gross fixed investment -2.2 -2.8 2.6 3.2
Stock building 2/ 0.3 0.2 -0.5 0.1
Net foreign balance 2/ 1.0 1.0 0.4 1.6
Nominal GDP (in trillions of won) 1,898 1,919 1,921 1,988
Saving and investment (in percent of GDP)
Gross national saving 36.0 35.0 36.2 36.6
Gross domestic investment 31.5 31.3 31.6 32.8
Current account balance 4.5 3.6 4.6 3.8
Prices (percent change)
CPI inflation (end of period) 1.3 0.7 0.5 1.2
CPI inflation (average) 1.5 0.4 0.5 1.4
Core inflation (average) 1.2 0.7 0.4 …
GDP deflator 0.5 -0.9 1.1 0.0
Real effective exchange rate 1.0 -4.6 -1.9 …
Trade (percent change)
Export volume 6.1 -2.1 0.9 10.5
Import volume 2.0 -0.8 0.0 7.7
Terms of trade -5.2 -4.1 3.8 -5.5
Consolidated central government (in percent of
GDP)
Revenue 22.9 23.0 22.9 22.8
Expenditure 20.4 22.6 25.7 25.1
Net lending (+) / borrowing (-) 2.6 0.4 -2.8 -2.2
Overall balance 1.6 -0.6 -4.2 -3.6
Excluding Social Security Funds -0.6 -2.8 -6.1 -5.5
General government debt 40.0 42.2 48.7 52.8
Money and credit (end of period)
Overnight call rate 1.9 1.4 0.5 …
Three-year AA- corporate bond yield 2.3 1.9 2.2 …
Credit growth 7.9 9.0 9.2 4.3
Balance of payments (in billions of U.S. dollars)
Exports, f.o.b. 626.3 556.7 516.6 596.9
Imports, f.o.b. 516.2 476.9 434.7 518.1
Current account balance 77.5 59.7 75.3 67.4
Gross international reserves (end of period) 3/ 398.9 404.0 438.3 440.8
In percent of short-term debt (residual maturity) 218.7 207.9 193.3 204.3
External debt (in billions of U.S. dollars)
Total external debt (in percent of GDP) 25.6 28.4 33.3 31.3
Sources: Korean authorities; and IMF staff estimates and projections.
1/ This reflects the available information and projections when the 2021 Article IV Consultation staff report
was finalized. It does not incorporate the impact of the subsequently announced supplementary budget.
2/ Contribution to GDP growth.
3/ Excludes gold.
REPUBLIC OF KOREA
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION
March 2, 2021
KEY ISSUES
Context. Korea entered the COVID-19 pandemic with sound macroeconomic
fundamentals and a resilient financial system. The initial outbreak led to a sharp decline
in economic activity and employment and generated substantial economic slack. With
the help of an effective COVID-19 containment strategy and comprehensive economic
policy response, the overall impact was smaller than in peers, with real GDP growth in
2020 of -1.0 percent. The economy is projected to grow 3.4 percent in 2021, albeit at
varying speeds across sectors, and with a high degree of uncertainty centered on the
speed of normalization in the COVID situation. Public debt has risen and deficits have
widened but remain at manageable levels. Credit continues to grow rapidly, financial
markets have normalized quickly, and the financial sector has remained relatively sound
to date despite the pandemic. The authorities are pursuing greener and more digital
growth, along with a stronger social safety net, through the Korean New Deal.
Main policy recommendations. More accommodative fiscal and monetary policy
would help the economy normalize faster, sustain affected small businesses, and bring
discouraged workers back into the labor force.
• Fiscal policy should be the main instrument to provide support by taking a modestly
positive or at least neutral stance in 2021, which could be achieved by raising
targeted transfers to affected workers and firms, and accelerating public investment.
• Gradual fiscal consolidation can be undertaken once the recovery takes hold.
Introducing a rules-based fiscal framework would provide a long-term anchor for the
public finances.
• Additional monetary policy support would help underpin the recovery and bring
inflation closer to the BOK’s target more quickly, while financial stability risks can be
addressed through macroprudential policies. These appear appropriately set at
present but can be tightened further if household credit continues to rise sharply.
• Maintaining credit support measures as planned will help avoid a premature
tightening of credit, especially for SMEs. As the economy recovers, the focus of
support should shift from liquidity provision to targeted measures that promote
corporate restructuring and solvency.
• The Korean New Deal rightly seeks to develop new growth drivers and increase
inclusiveness. Complementary reforms to reduce entry barriers, stimulate innovation,
and lower labor market rigidities can provide a further boost to potential growth.
REPUBLIC OF KOREA
Approved By Virtual consultations took place from January 12–26, 2021. The mission
Kenneth Kang and team was Andreas Bauer (head), Si Guo, Sung Jin Kim, Sohrab Rafiq, and
Martin Kaufman Andrew Swiston (all APD). Maksym Markevych (LEG), Ian Parry (FAD), and
Anjum Rosha (LEG) participated in some meetings. Chang Huh, Byunghee
Yoo, and Jinhyuk Yoo (all OED) joined the virtual meetings. Paola Castillo
and Livia Tolentino contributed to the preparation of this report.
CONTENTS
PRE-COVID-19 CONTEXT ________________________________________________________________________ 3
RECENT ECONOMIC DEVELOPMENTS __________________________________________________________ 3
OUTLOOK AND RISKS _________________________________________________________________________ 13
POLICY DISCUSSIONS _________________________________________________________________________ 16
A. Fiscal Policy ___________________________________________________________________________________ 16
B. Monetary Policy and the FX Market ___________________________________________________________ 20
C. Financial Sector Policy_________________________________________________________________________ 23
D. Structural Policy _______________________________________________________________________________ 26
STAFF APPRAISAL _____________________________________________________________________________ 29
BOXES
1. Korea’s Health and Economic Response to the COVID-19 Outbreak ___________________________ 4
2. The Korean New Deal _________________________________________________________________________ 18
FIGURES
1. Activity, Employment, and Inflation_____________________________________________________________ 6
2. Policy Response to the COVID-19 Pandemic ___________________________________________________ 7
3. Financial Conditions Indicators ________________________________________________________________ 10
4. Leverage Cycle Dynamics______________________________________________________________________ 11
5. Corporate Balance Sheet Performance and Risk Indicators ____________________________________ 12
6. External Sector Developments _________________________________________________________________ 14
TABLES
1. Selected Economic Indicators, 2018–26 _______________________________________________________ 31
2. Balance of Payments, 2018–26 ________________________________________________________________ 32
3. Statement of Central Government Operations, 2018–26 ______________________________________ 33
4. Financial Soundness Indicators ________________________________________________________________ 34
ANNEXES
I. Follow-Up on Past IMF Recommendations _____________________________________________________ 35
II. Key Economic Policies in Response to COVID-19 ______________________________________________ 36
III. External Stability Assessment _________________________________________________________________ 38
IV. Risk Assessment Matrix _______________________________________________________________________ 39
V. Public Debt Sustainability Analysis ____________________________________________________________ 41
2 INTERNATIONAL MONETARY FUND

REPUBLIC OF KOREA
PRE-COVID-19 CONTEXT
1. The Korean economy entered the COVID-19 pandemic with sound macroeconomic
fundamentals and high income but sluggish growth. Public debt and borrowing costs were low
and external vulnerabilities were well contained, with a net international creditor position, adequate
reserves, and a flexible exchange rate. The recent FSAP pointed to some vulnerabilities from high
private debt but found most parts of the financial system prudentially sound and resilient. While per
capita incomes exceed $30,000, growth slowed to an average of 2.8 percent over the last five years,
reaching only 2.0 percent in 2019. The resulting economic slack kept inflation well below the Bank of
Korea’s (BOK) two percent target.
2. The country has been confronting some social challenges. These include longstanding
inequalities in the educational system and labor markets, especially for women, youth, and the
elderly, as well as rising housing prices in metropolitan Seoul (home to about half the population).
The Moon administration, in office since 2017, has substantially raised the minimum wage,
expanded public sector jobs, and implemented measures to expand housing supply and contain
speculative demand to ensure more equitable access. In line with past Fund recommendations, fiscal
policy turned expansionary from 2019 onward with steps taken to strengthen social safety nets.
However, progress on reducing rigidities in product and labor markets has been slower (Annex I).
President Moon’s party currently holds a majority in the National Assembly, with presidential
elections due in March 2022 (presidents serve a
single term).
RECENT ECONOMIC
DEVELOPMENTS
3. Economic developments have been
driven by the pandemic. Infections first spiked
in February (text figure), leading to a downturn
in Q1-2020. This was exacerbated in Q2 by
supply chain disruptions and reduced external
demand stemming from an intensification of
outbreaks in major trading partners. The
authorities’ comprehensive strategy to combat
the virus helped bring new cases near zero by
the summer (Box 1), which along with external
re-opening helped the economy rebound in Q3
despite a small spike in infections. The recovery
softened in Q4 as infections reached new highs
and distancing measures were tightened (text
figure), with real GDP growth for 2020
at -1.0 percent (Figure 1).
INTERNATIONAL MONETARY FUND 3

REPUBLIC OF KOREA
Box 1. Korea’s Health and Economic Response to the COVID-19 Outbreak1

Korea quickly brought the COVID-19 outbreak under control without imposing stringent lockdowns.
Learning from the experience with MERS in 2015, the authorities had boosted pandemic preparedness,
allowing them to rapidly deploy an effective containment strategy while minimizing business shutdowns and
other restrictions:
• Testing. Extensive and timely testing was key to
containing the virus’ spread. The authorities
aggressively ramped up testing capacity with fast-
track approval for test kits and setting up quick
diagnostic capabilities, such as drive-through and
walk-through facilities. Korea reached a higher
initial test density than peers, performing more
than 300 thousand tests by late March 2020 (text
figure).
• Tracing. Data-driven epidemiological
investigations were performed, using credit card
transactions, GPS, and other data. Relevant
anonymized information was disclosed to the
public to track down potential infections. Digital tools (e.g., mobile apps) were widely deployed to
facilitate contact tracing.
• Treatment. Korea established a triage to identify and hospitalize high-risk patients while isolating and
monitoring those with mild symptoms at community treatment centers. The authorities rapidly secured
additional beds and temporary isolation rooms with portable negative pressure devices.
An active coordinating role of the central government facilitated effective containment. The central
government took the lead in cooperating and communicating with the private sector to accelerate test kit
production, expand diagnostic networks, centralize COVID-related data, and develop digital tools, such as
apps for quarantine/isolation management, for use at local levels. When necessary, the government also
intervened in markets to address shortages of critical medical resources (e.g., masks) through centralized
purchasing and prioritized distribution.
This approach, along with the proactive
economic policy response, helped contain the
economic impact. The impact, as measured by
2020 real GDP growth relative to pre-COVID
projections, ranked as the mildest among G-20
advanced economies (text figure). This was
facilitated by key aspects of the response:
• Targeted fiscal policy. Above-the-line fiscal
support (2.9 percent of GDP) was not
particularly large compared to other advanced
economies, but was rolled out in phases as needs
evolved, including through four supplementary
budgets. Measures were mostly targeted toward
disease control and prevention, and support to affected businesses and workers. Broad stimulus was
avoided during the period of high uncertainty when its effect likely would have been low. The first
emergency relief transfer to all households in May was well-timed with a decline in infections. This, along
with the time-bound availability of these transfers, contributed to a marked pick-up in household
spending.

REPUBLIC OF KOREA
Box 1. Korea’s Health and Economic Response to the COVID-19 Outbreak (Concluded)
• Rapid market stabilization. In a context of high uncertainty and market jitters, the authorities rapidly
deployed a number of financial facilities to help preserve stability, building on experience with such tools
in previous episodes of stress. This included equity and bond market stabilization funds financed jointly
by policy banks and private financial institutions. The Bank of Korea (BOK) conducted foreign exchange
(FX) auctions tapping the U.S. Fed swap line, which helped ease U.S. dollar funding strains. The BOK also
rolled out several novel measures, using unlimited repo operations to ensure sufficient systemic liquidity,
and with the KDB (a policy bank) creating an SPV to purchase low-rated corporate bonds to address
tightness in that market segment.
• Ample credit availability. The authorities early recognized the financing need of affected businesses,
especially SMEs, for near-term debt service and additional working capital. As in previous downturns, the
authorities provided standardized terms and regulatory incentives for a voluntary loan payment deferral
program by financial institutions and rolled out credit facilities amounting to about 5.5 percent of GDP.
These include fresh loans and guarantees to SMEs through public banks and private financial institutions,
an industry stabilization fund to provide financing and facilitate restructurings of large firms in severely
affected sectors, and an SPV to purchase SME working capital loans financed by the KDB.
1
Prepared by Sung Jin Kim and Andrew Swiston. See the following for details; Ministry of Economy and Finance (2020),
“Tackling COVID-19, Health, Quarantine and Economic Measures: Korean Experience”, and the Government of the
Republic of Korea (2020), “COVID-19, Testing Time for Resilience” in ”Recovering from COVID-19: Korean experience”.
4. The authorities have used available policy space to cushion the economic effects of the
pandemic, deploying a wide array of fiscal, monetary, and financial measures (Annex II;
Figure 2). Fiscal policy was eased, adding to an already expansionary stance of the original 2020
budget (text figure). Much of the discretionary support to households, workers, and SMEs was
targeted to those most affected, through both
expansion of existing programs and new
measures. The overall fiscal balance for 2020 is
estimated at -4.1 percent of GDP, with an
estimated fiscal impulse of 2.6 percent of GDP.
The BOK reduced its policy rate by 75 basis
points, to 0.5 percent. The BOK also
temporarily offered unlimited repos to ensure
sufficient availability of liquidity and made
some small government bond purchases to
prevent market volatility, among other
measures. Several lending and guarantee
programs and other funds were implemented to ensure availability of credit—especially for SMEs—
and stabilize financial markets. Some macro- and micro-financial regulations were also eased
temporarily to ensure liquidity and lending capacity of financial institutions remained ample.
Together these measures helped tide affected firms and workers through the shock, underpinning
private consumption and investment.

REPUBLIC OF KOREA
Figure 1. Activity, Employment, and Inflation

The economy is recovering from the H1-2020 contraction, driven Investment is also buoyant as exporting firms expand facilities,
by a rebound in exports. while consumption remains well below pre-COVID levels.
The labor market recovery has lagged, with a high proportion of …and resulting in relatively high levels of labor underutilization,
those losing jobs exiting the labor force… raising concerns about scarring.
Inflation has stabilized after a dip early in the COVID shock, but …and expectations are below the inflation target.
both actual inflation…
Sources: National sources; Haver Analytics; Consensus Forecasts; and IMF staff calculations.

REPUBLIC OF KOREA
Figure 2. Policy Response to the COVID-19 Pandemic

The government boosted expenditure for COVID mitigation and The expansion of unemployment benefits reached a large share of
provided transfers to affected firms and households. those looking for jobs.
Credit support programs were substantial, especially those …which has helped boost credit flows.
targeted for SMEs…
Policy rate cuts have transmitted to short-term rates, but less so The expansion of the BOK balance sheet has been comparatively
farther out the yield curve. small.
Sources: National sources; Haver Analytics; and IMF staff calculations.

REPUBLIC OF KOREA
5. The recovery in economic activity has

been uneven across sectors. Manufacturing
and exports have rebounded strongly after
falling due to the COVID-related collapse in
trading partner imports (text figure). Tech
exports are outperforming, reflecting
pandemic-induced increases in online activities.
This has supported buoyant business
investment. By contrast, services activity has
been sluggish, weighed down by still-
depressed consumption.
6. This “K-shaped” recovery is reflected in diverging outcomes at the firm and worker
level. Performance among large, tech export-oriented firms has been strong, while the services
sector where SMEs are more prevalent has lagged. Employment declined by one million jobs
(-3.7 percent) in March-April 2020, and after a
brief upturn has returned to this trough despite
the recovery in headline economic activity. Most
job losses have been experienced by “non-
regular” workers, while employment of “regular”
workers on open-ended contracts has held up.
The shock’s effects were also largest for lower-
wage sectors and lower-income earners (text
figure), falling more heavily on female and young
workers. This also likely exacerbated inequality,
though some of the near-term impact was offset
by temporary transfers.
7. The downturn has resulted in a substantial amount of economic slack and contributed
to persistently low inflation. Output remains lower than its pre-COVID level, with sizable slack
reflected in employment and labor force participation remaining well below their previous peaks.
With the decline in global energy prices, already-low headline inflation briefly turned negative in
2020. Despite recent rises in food and fuel prices, both headline and core inflation remain below
1 percent. Cumulative growth in 2019-20 of about 1 percent, below-trend employment and labor
force participation, below-average measured capacity utilization in manufacturing, and overall low
inflationary pressures, point to a negative output gap of around 2.5-3 percent of GDP in 2020.
8. Some financial market segments experienced stress after the initial COVID outbreak
due to non-bank exposures, but stabilized subsequently. Brokerages guaranteeing asset-backed
commercial paper experienced short-lived liquidity strains, and the cost of domestic dollar funding
temporarily spiked due to tightening global dollar conditions and FX demand driven by margin calls
on foreign investments made by local asset managers. Driven by search for yield, local asset
managers have taken increasing exposures in overseas markets through the selling of structured

REPUBLIC OF KOREA
financial products. The authorities have responded by taking steps to more tightly regulate the
securities-brokerage sector and increase disclosures, particulaly firms not under a financial holding
company.
9. Financial conditions have been generally kept accommodative since the COVID
outbreak (Figure 3). Risk-free rates have fallen and the yield curve has steepened, aiding banks’ net
interest margins (text figure). Banks have passed on lower rates to both households and corporates,
reflecting easier credit supply conditions. Capital
market term and risk premia have also fallen
reflecting reflationary expectations, policy easing,
and portfolio inflows. These factors coupled with
strong earnings growth for listed firms have helped
contain the corporate default cycle and driven the
equity market to record highs, aided by a short-
selling ban and strong retail investor demand. This
in turn has fueled strong IPO growth and
contained firm leverage. However, spreads on low
and sub-investment-grade corporate bonds remain
somewhat above pre-pandemic levels.
10. Credit growth has accelerated supported by policy measures, though risks are
contained by the resilience of the banking system. Due to strong credit demand leverage (debt-
to-GDP) gaps have widened to 6 percent for households and 4 percent for firms (Figure 4).
Household debt in Korea is among the highest in
the OECD at over 190 percent of net disposable
income in 2019, much of it reflecting leverage
against real estate. Pre-pandemic, around
15 percent (13 percent of GDP) of household
debt was owed by liquidity-constrained
households, and at risk from a snapback in
lending rates. Despite government interventions,
housing market transactions and prices have
risen, particularly in greater Seoul (text figure),
with signs of widening overvaluation (Figure 4).
Bank non-core funding and FX risks are small, but
bank profitability is structurally low due to a triad of lower growth, increasing competition from
Fintech, and demographic factors. Bank provisioning has risen substantially since the COVID
outbreak, albeit from low levels, with possible SME defaults posing some risks to balance sheets
(Figure 5). 1 In mitigation, however, NPL ratios remain low and FSAP stress tests found the banking
system to be resilient in macroeconomic shock scenarios that exceed the current downturn.
1 About 50 percent of SME debt (22 percent of GDP) was “at-risk” entering the outbreak. Firms with “debt at-risk” are
those reporting current interest coverage ratios below one.

REPUBLIC OF KOREA
Figure 3. Financial Conditions Indicators

After an initial dip equity prices have rallied, particularly for The long-term equity risk premium has fallen amidst greater risk
larger corporates. appetite and the Price-Earnings ratio is near a record high.
Risk premia returning to pre-COVID levels coupled with yield After tightening significantly, dollar funding conditions have also
curve steepening is consistent with economic normalization. eased, and the won has appreciated against the US dollar.
120
Funding risk premia
(basis points) 405
100
Corporate bond spread (3yr AAA rated -
3yr govt bond yield)
80 Marginal funding cost (91 day CPs and 395

CDs)
Yield curve slope (5yr - 1yr bond yield)
60
385
Corporate intra-bond spread (3yr BBB-
40 rated - 3yr AAA-rated) (rhs)
375
20
365
0
-20 355
2019 2020
In line with greater risk-taking the term premium is compressed, Markets are pricing in higher short-term rates, which together with
with yields driven by expectations of future short-term rates. compressed bond risk premia is suggestive of optimism.
Sources: Haver Analytics; Starmine; DataStream; National sources; and IMF staff calculations.

REPUBLIC OF KOREA
Figure 4. Leverage Cycle Dynamics

Leverage gaps for households and non-financial corporates ...driven by strong leverage flows independent of macro
continue to widen… developments, suggestive of strong risk appetite.
Aided by policy support, bank lending risk premia has fallen for Risks from household debt are mitigated by a low share of
households and corporates. subprime lending.
Nonetheless, there are some pockets of risks, including debt …as well as growing real estate price overvaluation in the Seoul
owed by liquidity-constrained households… metropolitan area.
Sources: Korea Survey of Household and Living Conditions; National sources; and IMF staff calculations.

REPUBLIC OF KOREA
Figure 5. Corporate Balance Sheet Performance and Risk Indicators

The corporate default cycle for large and medium firms has Dispersion in firm performance only briefly widened, a sign of
remained stable across sectors since the COVID outbreak. limited corporate scarring for large and medium firms thus far.
Post-COVID corporate performance expectations are for These beliefs are being driven by strong earnings forecasts for
continued robust profitability. Korean corporates.
Nonetheless, around one quarter of non-financial corporate debt …with most of the debt-at-risk owed by SMEs.
was at risk pre-COVID and is likely to have risen since…
Sources: National sources; KIS Value; DataStream; Eikon; Haver Analytics; and IMF staff calculations.

REPUBLIC OF KOREA
11. Preliminary estimates for 2020 suggest that the external position remained broadly in
line with medium-term fundamentals and desirable policies (Annex III). Exports and imports
declined sharply in the pandemic’s initial stages amidst supply chain disruptions and shutdowns in
trading partners. With exports rebounding since Q3-2020 and a narrower services deficit due to
continued COVID-related travel restrictions, the current account balance rose to 4.6 percent of GDP
in 2020 from 3.6 percent in 2019 (Figure 6). Over the medium term, the current account surplus is
projected to narrow somewhat to 4.3 percent of GDP as domestic demand recovers and transitory
factors stemming from the COVID shock recede. After initial equity outflows by nonresidents, overall
capital flows in 2020 have been buoyant supported by bond inflows and a slowdown in outward
investment by residents. Reflecting these developments, the won has appreciated, and is stronger
than pre-COVID levels in both nominal and real effective terms. International reserves increased
somewhat and remain adequate in comparison with the Fund’s reserve adequacy metric.
OUTLOOK AND RISKS

12. The recovery is expected to accelerate, yet in a still-uneven manner. While the Q4-2020
surge in infections and tightening of distancing measures lowered household consumption and
business sentiment, these factors have been gradually normalizing in Q1-2021. With the economies of
major trading partners expected to rebound, exports and the related fixed investment are likely to
remain key drivers of near-term growth. These factors suggest that the divergence in performance
between exports and manufacturing on the one hand, and services and consumption on the other, is
likely to persist, at least in the near term. Real GDP growth is projected to exceed its potential rate, at
3.4 percent in 2021 and 2.9 percent in 2022. This assumes a gradual COVID-19 normalization both
domestically and externally with rollout of an effective vaccine in Korea through end-year. It builds in a
drag from the fiscal impulse of -0.3 percent of GDP implicit in the 2021 budget, along with diminishing
use of off-balance-sheet credit support. With output and employment below potential, inflation is
forecast to rise modestly to 1.2 percent in 2021 on higher commodity prices, and is projected to
remain below target for some time.
13. The recovery would leave substantial

economic slack into the medium term, running the
risk of scarring. For the medium term, while there is a
wide range of uncertainty, the pandemic is projected
to add to the demographic-driven slowdown in
potential growth through a few channels: 1) weakened
corporate balance sheets weighing on investment and
job creation; 2) subdued employment due to the high
number of labor force exits; and 3) frictions as the
economy adjusts to shifts in the sectoral composition
of demand amidst rigidities in product and labor
markets. 2 This implies that potential output would remain about 2.5–3 percent below the pre-shock
path by 2025 (text figure)—albeit with a wide range of uncertainty. In the near term these factors are
likely to weigh more on actual output, implying that the output gap would close only gradually through
the medium term in the absence of substantial additional policy measures to stimulate demand.
2
See the Selected Issues Paper “Assessment of Potential Output and the Output Gap”.

REPUBLIC OF KOREA
Figure 6. External Sector Developments

The current account surplus narrowed until 2019 but widened in …as exports strongly rebounded from Q3-2020, driven by
2020… external demand for tech products.
…and the services deficit narrowed due largely to COVID-19 Nonresident portfolio flows remained relatively stable, with
travel restrictions. strong debt inflows outweighing some equity outflows in 2020.
After depreciating in H1-2020, the won has recovered pre- Reserves increased in 2020 and continue to remain adequate.
COVID levels in both nominal and real effective terms.
Sources: National sources; Haver Analytics; CEIC; and IMF staff calculations.

REPUBLIC OF KOREA
14. With this forecast assuming a gradual COVID-19 normalization, including rollout of an
effective vaccine through end-year, uncertainty surrounding the outlook remains high
(Annex IV). The risks to the outlook are broadly balanced, with COVID-related factors the principal
risks in both directions. Renewed surges in infections and slower vaccinations—either domestically
or abroad—are the largest downside risk, while growth could surprise to the upside in case of a
faster-than-expected containment of the pandemic or continued resilient semiconductor demand
spurring exports and investment. Other downside risks include second-round effects on
consumption and investment from weakened household and SME balance sheets, and negative
spillovers on the tech sector if trade tensions recur. Finally, a snapback in risk premia could trigger
outflows and an asset price correction, impacting firms with large short-term gross financing
requirements.
Authorities’ Views
15. The authorities broadly agreed with staff’s outlook for growth and inflation in 2021.
They expected exports to continue to lead the recovery, with prospects for tech exports still strong,
though dependent on COVID-19 developments globally. Regarding consumption, while recent data
had been soft, policy measures would continue to provide support early in the year and a second-
half boost from vaccination and re-opening could be expected. They agreed economic slack was
sizable, emphasizing substantial uncertainty in estimates of the output gap and in the COVID-19
impact on potential growth given the unique nature of the pandemic. The authorities shared staff’s
views on inflation for 2021 in that some factors that had weighed it down last year, such as global oil
prices and low demand in the services sector, could add to inflation in 2021.
16. The authorities noted that uncertainty surrounding the forecast remains high and
agreed that COVID-19 developments were the biggest risk factor. They concurred that the
possibility of additional outbreaks and the speed of vaccination presented both upside and
downside risks—including from the pace of progress globally. They saw scope for pent-up demand
to spur consumption as activities normalize and emphasized their ability and readiness to quickly
deploy additional support if risks to growth began to materialize.
17. The authorities agreed with the bottom-line findings of the preliminary 2020 external
sector assessment. While they reiterated their view that the EBA model does not fully capture some
factors important for Korea—including the need to save more in view of future challenges arising
from demographic change and possible reunification—they considered the external balance
position to be in equilibrium.

REPUBLIC OF KOREA
POLICY DISCUSSIONS
Building on the successful response to the COVID-19 shock, the key policy priorities for the period
ahead are to nurture the ongoing recovery and solidify the foundations for resilient, inclusive medium-
term growth. Against the backdrop of sizable economic slack, remaining downside risks to the
recovery, and available policy space, the benefits of taking a more accommodative stance to spur
private demand would outweigh the risks, by helping the economy normalize faster, sustaining
affected small businesses, and bringing discouraged workers back into the labor market. For the near
term, somewhat easier fiscal and monetary policy than implied in the authorities’ current plans is
recommended. Credit support programs should be maintained until the recovery broadens across
sectors and then be gradually phased out. Macroprudential policies should remain geared toward
maintaining and building resilience. Structural policies can focus on implementing and complementing
the Korean New Deal (KND), thus positioning the economy to take advantage of new drivers of growth
in the post-COVID environment while strengthening the safety net.
A. Fiscal Policy
18. The 2021 budget implies some fiscal

tightening relative to 2020 (text figure). The
tightening is estimated to be about 0.3 percent
of GDP after cyclical adjustment. This mainly
reflects the essentially flat nominal overall
expenditure growth in the 2021 budget as
expiration of some temporary transfers ramped
up in 2020 will offset higher spending in R&D,
infrastructure, and the environment. These
spending initiatives are partly attributable to the
KND, a multi-year fiscal package with
expenditures of about 1 percent GDP per year
that aims to increase digital and green investment and strengthen the social safety net (Box 2).
Spending was reallocated within the approved budget to provide immediate transfers of 0.5 percent
of GDP (KRW 9.3tr) to affected firms and workers, and budget execution is being frontloaded.
19. A more expansionary fiscal stance for 2021 would be desirable. Korea has substantial
fiscal space and sufficient administrative capacity to provide targeted fiscal support. 3 Fiscal policy is
also likely to have a greater impact on private activity during this period of accommodative
monetary policy and economic slack, and its impact on demand could help return discouraged
workers to the labor force. These factors suggest that a modestly positive or at least neutral overall
contribution of fiscal policy to the economy for 2021 would be appropriate.
3
Staff’s Debt Sustainability Analysis (Annex V) shows that central government debt is projected to rise from
36 percent of GDP in 2019 to about 62 percent of GDP in 2025, which is well within manageable levels. The
projection is based on current policies and thus does not incorporate the impact of the proposed fiscal rule.

REPUBLIC OF KOREA
20. Given persisting heterogeneity in the impact of the pandemic on firms and
households, policy measures should focus on supporting those who remain affected in a
targeted manner and on preventing permanent scarring. An expansionary overall stance could
be achieved by focusing direct support on sectors that are lagging in the recovery, expanding
measures to enhance inclusion and equity. Possibilities include speeding up the expansion of social
security programs to non-regular workers, temporarily extending the duration of unemployment
benefits, strengthening job search support, increasing the basic pension for the lowest-income
quintile (text table). In addition, where feasible, public investment projects (such as the green and
digital projects under the KND) should be accelerated. Several of these measures would have the
added benefit of providing a welcome boost to medium-term potential growth.
Main Labor Market Safety Net Measures in 2020
Purpose /
Existing / New Measures in 2020 Staff Recommendation
Beneficiaries
Partial wage The government eased application

Job Retention Consider returning to pre-COVID status
Existing subsidies to requirements and increased the
Program after the COVID shock
prevent job losses generosity of subsidies.
During the COVID shock: extend the

Coverage was expanded to artists
duration (for young and mid-aged
and people working in cultural
workers, and workers with shorter
Employment Unemployed industries. Some eligibility
Existing employment history) with reduced benefit.
Insurance workers conditions (such as the job search
After the COVID shock: expand EI
and training requirements) were
coverage to salaried workers with non-
relaxed.
standard contracts.
The government provided
New (for self- emergency unemployment As EI is expanded to more salaried
Unemployment employed); Unemployed assistance to self-employed, workers, unemployment assistance can
Assistance Existing (for workers freelancers and youth who are not focus on non-salaried workers and
youth) covered by the Employment training afterwards.
Insurance Program.
Employees that
Subsidized The government provided a subsidy
apply for family Consider making the subsidy recurrent, at
Family Care New to applicants for (previously unpaid)
care leave to care least for double-earner families.
Leave family care leave.
their children
Household A one-off transfer was made for up Untargeted transfers to households are
Emergency New All households to KRW 1 million for each recommended to be used only as last
Relief Program household. resort.
21. Gradual consolidation can be undertaken subsequently. Compared to the pre-COVID

medium-term budget plan, average budget deficits for 2021-2024 are 1.8 percent of GDP higher. In
contrast to the relatively flat deficit profile in the budget’s medium-term fiscal outlook, the
recommendation for an easier stance in 2021 can be followed by gradual consolidation in 2022–24
when the recovery is more advanced, without altering the envisaged cumulative deficit. This can be
achieved as COVID-related spending unwinds and by following the longstanding IMF
recommendation to begin raising the revenue-GDP ratio over the medium term. 4
4
See Republic of Korea: 2019 Article IV Consultation, IMF Country Report No. 19/132.

REPUBLIC OF KOREA
Box 2. The Korean New Deal1
The Korean New Deal (KND) is a national development strategy introduced in July 2020. It aims to
mitigate the economic impact of the COVID shock, facilitate transformation toward a digital and green
economy, and achieve greater inclusiveness. The KND includes three main pillars:
• Digital New Deal. Aims to further strengthen digital capacity and promote innovation, based on Korea’s
comparative advantage in information and communication technology. Projects focus on ICT
infrastructure, such as the installation of 5G across the country supported by tax incentives and fee
exemptions. AI and 5G technologies will also be promoted for data collection and utilization to build
smart factories, digitalize library and educational materials, provide smart healthcare, and help the
government better target safety net programs.
• Green New Deal. Aims to accelerate the transition towards a low-carbon economy and achieve net-zero
carbon emissions by 2050. Key projects include investment in energy infrastructure that promotes energy
efficiency and reduces emissions, such as renewable energy, green remodeling of school buildings and
rental houses, installation of electronic vehicle charging facilities, and fuel subsidies for hydrogen vehicles.
• Social safety net. The KND seeks to reduce gaps in the employment insurance scheme through phased-in
expansion of coverage to workers in non-standard forms of employment (e.g., artists and freelancers) and
strengthen the safety net through relaxation of the eligibility criteria for the basic livelihood security
benefits. It will also include the establishment of a “future-oriented” job training system to allow a smooth
transition between occupations and nurture talent for innovation.
The Korean New Deal seeks to boost both public and private investment on these priorities. It
envisages KRW 114 trillion (equivalent to 5.9 percent of 2019 GDP) in public spending and KRW 45.9 trillion
in associated private investment during 2020-2025 (text table). To facilitate private investment, regulations
applying to the utilities and transportation sectors, among others, are being streamlined.
Overview of Korean New Deal
1
Prepared by Si Guo. The box provides a summary of the Korean New Deal, based on “The Korean New Deal – National
Strategy for a Great Transformation” published by the Korean government in July 2020.

REPUBLIC OF KOREA
22. To maintain transparency and ensure support for the budget, the government can
explore ways to further enhance the disclosure of information about the use of public funds.
This is especially relevant in the context of a rapid roll-out of relief spending during the COVID
shock. Korea already publishes the key contents of public procurement contracts. Staff recommends
that the authorities expand the disclosures to include beneficial ownership information of legal
persons that have been awarded government procurement contracts. This would be facilitated by
the implementation of relevant recommendations of the 2020 FATF/APG assessment and help
prevent conflicts of interest in public procurement processes. 5
23. Against the expected fiscal pressure from aging, the government has put forward a
welcome proposal to anchor the public finances within a rules-based framework. The
government has recently proposed a fiscal rule that features a gross debt anchor at 60 percent of
GDP and a flexible consolidated deficit target of 3 percent of GDP. 6 The proposal also includes an
escape clause that would suspend the application of the rule under extraordinary circumstances
(such as wars, large disasters, and global economic crises) and a provision to temporarily ease the
deficit target by 1 percent of GDP in case of a slowdown. The gross debt anchor is prudent from a
debt sustainability perspective and appears broadly appropriate from the perspective of the optimal
debt level literature. Because the deficit target under the proposed rule is unlikely to stabilize the
debt near 60 percent of GDP, the scope for desirable countercyclical fiscal policy will hinge critically
on the effectiveness of the “slowdown provision”, for which operational details still remain to be
finalized and specified in the implementing regulations. An expenditure rule—a path for annual
ceilings on budgetary expenditure—in lieu of a deficit target could be considered to achieve some
countercyclicality without reliance on a slowdown provision, albeit it would raise other
implementation challenges such as the need for rule adjustments in response to major tax policy
changes. To enhance the credibility of the proposed rule, staff recommends the designation of an
independent institution (e.g. a fiscal council) to monitor, review and enforce it. Major modifications
of the rule should be subject to National Assembly approval.
24. The authorities viewed near-term fiscal policy as sufficiently accommodative for the
time being, while indicating readiness to provide additional support if conditions warranted.
They emphasized that the 2021 budget was significantly more expansionary than the original 2020
budget and expected an additional boost from recent emergency transfers and frontloading of
expenditure. They did not see additional support as necessary under the baseline, but given the
5
The FATF/APG assessment (Immediate Outcome 5, recommended action (c)) notes that Korea should adopt
mechanisms to ensure the accuracy of the basic and beneficial ownership information available on the various
registers, such as by verifying information at the time of registration, conducting post-registration testing of records,
and encouraging users (especially financial institutions and casinos) to report errors.
6
The debt and deficit limits would be “soft” limits governed by the formula: {Government debt / 60%} *
{Consolidated fiscal balance / (-3%)} ≤ 1. See the Selected Issues Paper “Fiscal Rules in Korea—Some Considerations”
for further detail and discussion.

REPUBLIC OF KOREA
uncertainty surrounding the outlook noted they would take discretionary action if necessary. They
agreed that any further stimulus should be targeted to the sectors lagging in the recovery.
25. The authorities reiterated their commitment to prudent medium- and long-term fiscal
management, supported by the proposed fiscal rule. Against the backdrop of expected fiscal
pressures from rapid population aging, the proposed rule would help contain the pace of future
debt increases. The authorities agreed on the usefulness of establishing a council to oversee its
implementation, provided that they retain full latitude to formulate and amend the budget. They
also firmly believed that the fiscal authority should fully govern material modifications of the rule.
On their choice of a deficit-based operational rule, the authorities were confident that the proposal
would allow for countercyclical policy through the flexibility built into the formula and a planned
“economic slowdown” provision that would be specified through regulation, after passage by the
National Assembly. The authorities felt that their design had advantages over other approaches to
ensure countercyclicality, such as an expenditure rule, including better compatibility with possible
revenue policy changes in the future.
B. Monetary Policy and the FX Market
26. The policy rate has been brought to

historically low levels in nominal terms,
albeit this reflects to some extent declines in
inflation expectations and the neutral rate.
Staff analytical work using a variety of
approaches finds a plausible range for the real
neutral policy rate of 0 to -1.5 percent. With
one-year inflation expectations between 1.1 and
1.8 percent, the real ex-ante policy rate is just
below the midpoint of the estimated neutral
range (text figure). Taking estimation
uncertainty and the overall credit and financial
conditions into account, staff assesses the current monetary stance as moderately accommodative.
27. Given the still-tentative recovery, sizable economic slack, and inflation well below
target, a more firmly accommodative near-term stance would seem desirable. This would
support the recovery in private domestic demand and help avoid a cliff in lending as support from
credit facilities diminishes, while macroprudential policies can be geared to addressing financial
stability risks (see below). With long-term inflation expectations below target, staff also sees up-
front easing as reducing the risks of entrenching an environment of below-target expectations and
low-for-long interest rates.

REPUBLIC OF KOREA
28. Additional near-term accommodation

can be provided through a number of
instruments. It could be achieved through a
modest further easing of the policy rate, using
the remaining space above zero and putting
Korea’s rate in line with advanced economy
peers. With financial markets pricing in some
policy tightening within the next two years there
is also scope for the BOK to narrow yields
through forward guidance that policy would not
be tightened until actual inflation is near the
target (text figure). 7 Forward guidance would
also help policy expectations to adjust as the anticipated duration of pandemic-related effects on
the economy changes. Finally, the BOK could act to ease credit conditions in a more targeted way,
further expanding its Bank Intermediated Lending Support Facility (BILSF) or corporate
bond/commercial paper SPV.
29. If downside risks materialize, unconventional policies could be deployed and scaled
up. Unlimited support through repo operations has provided an effective backstop during a period
of high uncertainty and could be reintroduced if concerns over financial system liquidity arise.
Because of the structurally low profitability of banks, negative rates appear less suited for Korea.
With a majority of government securities held by the domestic financial sector, expanded BOK
purchases—possibly through a program of yield curve control (YCC)—could increase lending and
boost markets through the portfolio channel. Any asset purchase program would need to be
accompanied by clear communication about its rationale and objectives.
30. The exchange rate has continued to move flexibly, with intervention limited to
preventing disorderly market conditions, and the authorities are taking steps to deal with
potential sources of market volatility. FX intervention in H1-2020 was $6.2 billion (net sales,
excluding temporary use of the Fed swap line) but returned to zero in 2020-Q3. 8 Easing of the
leverage cap on banks' FX derivatives positions and temporary exemption of the levy on FX funding
helped reduce initial strains on dollar funding and liquidity. 9 The authorities recently announced
welcome plans to strengthen FX liquidity regulations and monitoring for non-banks and improve
7
Previous analytical work emphasized the need to enhance communication on how the inflation target would be
reached. See K. Clinton and others, “Strengthening the Monetary Policy Framework in Korea,” IMF Working Paper
19/103.
8
Reserves nevertheless increased by $11.7 billion through 2020-Q3, due to interest on reserves and valuation gains
from reserve assets not denominated in U.S. dollars.
9
The 2020 FSAP found that these tools, which are classified by the Fund as CFM/MPMs, have been helpful in
improving banks’ resilience to FX shocks and reducing FX maturity mismatches. The authorities should periodically
review their continued effectiveness and whether there are alternative measures that directly address the systemic
financial risks but are not designed to limit capital flows.

REPUBLIC OF KOREA
the FX policy framework by launching an interagency FX macroprudential council. 10 The authorities

have also created a facility, to be activated in times of stress, that enables banks and non-bank
financial institutions to obtain FX funding through repos of high-quality FX-denominated securities.
31. The BOK viewed that its current accommodative monetary policy stance is
appropriate, considering macroeconomic and financial stability conditions in a comprehensive
manner. While acknowledging sizable economic slack and below-target inflation, the BOK viewed
the benefits of additional policy rate cuts as being outweighed by the potential stability risks of a
further loosening in financial conditions that could result. The BOK expected excess capacity to
diminish more quickly than staff did and inflation expectations to continue to rise gradually. While
the BOK acknowledges the availability of other macroprudential policy tools, it viewed that, under its
mandate for price stability and financial stability, it should also pay close attention to the
accumulation of financial imbalance risks arising from loose financial conditions.
32. If downside risks materialize in the near term, the BOK saw ample scope for support
through its existing targeted instruments. The BILSF and the corporate bond/commercial paper
SPV were seen as having successfully channeled credit to affected borrowers, and recent expansion
and easing of terms could be repeated if conditions warranted. Regarding its purchases of KTBs, the
BOK emphasized that the aim was to avoid market volatility upon news of increased supply and not
to more broadly loosen financial conditions. While viewing the possibility of another systemic
liquidity squeeze as highly unlikely, the BOK agreed that unlimited repo operations and other
liquidity measures could be quickly deployed in such circumstances. The BOK did not anticipate
conditions arising that would call for considering quantitative easing or other unconventional policy
tools.
33. The authorities stressed their commitment to exchange rate flexibility and limiting FX
intervention to preventing disorderly market conditions. They believed the recent steps to
strengthen FX prudential measures would contribute to market stability, and they would continue
monitoring and reviewing policy settings as appropriate. The recently established FX repo facility
was intended as a backstop to be activated when needed, in order to permit the market to meet FX
needs in most circumstances.
10
Existing FX prudential regulations and monitoring center largely on the banking sector. To mitigate the risk of FX
pressures driven by the non-bank sector, as experienced at the onset of the pandemic, the authorities will (i) enhance
monitoring of FX exposures of non-banks (including FX funding capacity and FX asset-liability maturity mismatch);
(ii) require securities firms to hold liquid assets for more than 20 percent of their structured products related to
foreign assets; (iii) conduct FX liquidity stress tests on securities firms and insurers, and; (iv) set up an FX macro-
prudential council to discuss adjustments in FX macro-prudential policies and improve FX policy coordination
between various government agencies.

REPUBLIC OF KOREA
C. Financial Sector Policy
34. Credit support measures should be maintained until the recovery broadens across
sectors, and some of the tools to support SMEs should be sharpened. With loan officer surveys
signaling tighter lending standards and more than KRW 50tr in loan deferrals coming due in the first
half of 2021 alone, the objective is to avoid a corporate lending cliff, especially for SMEs. The BOK’s
BILSF, which is bank-intermediated and thus involves viability screening, can be expanded as
needed. The authorities should also keep the conditions and focus under review to facilitate
utilization of some emergency credit facilities with unused balances, such as the Key Industry
Stabilization Fund, the Emergency Lending Program for Small Merchants, and the Working Capital
Support Program. Some continued risk sharing through instruments such as partial loan guarantees
may also be needed to help maintain bank lending to firms in the hardest hit sectors as loan
deferrals expire. Moreover, the authorities may need to consider solvency support, including
through equity and quasi-equity instruments, for viable firms with severely weakened balance sheets
due to the pandemic shock. 11 Once the recovery broadens, a gradual withdrawal of support will be
appropriate to facilitate necessary resource reallocation and avoid distortions, including in trade-
related sectors. Relevant financial indicators to be taken into account when calibrating the
withdrawal include the evolution of banks’ lending standards, projected/budgeted lending growth
by banks and other financial institutions, and indicators of corporate financial health, in particular
the recovery in operating revenues across different sectors.
35. The macroprudential stance appears broadly proportionate to risks but should be
tightened further if household credit continues to rise sharply. Financial stability risks from
rising household leverage gaps are mitigated by relatively low LTV ratios, a low incidence of
subprime lending, and rising shares of secured and fixed-rate amortizing lending. FSAP stress tests
—applying a more severe economic shock than the current downturn—also suggest that household
and non-financial corporate balance sheets are relatively resilient. 12 Nonetheless, the recent
tightening in prudential limits and bank risk management processes on unsecured household
lending was appropriate as these were partly being used as a source of financing for the equity
market. Staff analysis for Korea shows that borrower-based prudential policies that constrain leverage
are effective in moderating downside risks to future house price growth and containing probabilities
of household debt default (see below figures). 13 To maintain resilience therefore, the authorities
11
See A. Bauer and others, “Flattening the Insolvency Curve: Promoting Corporate Restructuring in Asia and the
Pacific in the Post-C19 Recovery,” IMF Working Paper 21/16.
12
See Republic of Korea: Financial Sector Assessment Program-Technical Note-Non-Financial Balance Sheet
Vulnerabilities and Risks to Financial Stability: https://www.imf.org/en/Publications/CR/Issues/2020/09/18/Republic-
of-Korea-Financial-Sector-Assessment-Program-Technical-Note-Non-Financial-Balance-49750.
13
The impact of prudential policies is likely greater in Seoul than elsewhere as (i) the city contains more than half of
Korea’s entire housing stock by value; (ii) the real estate price per square foot is highest in Seoul, and therefore where
households are most leveraged, and; (iii) there is a significant real estate supply shortage. Also see “Evolution of
Macroprudential Policies in Korea,” in Republic of Korea: Selected Issues, IMF Country Report No. 19/133, which
examined the impact of individual macroprudential policies on Korean house prices and found adjustments in the
LTV ratio and stamp duty to be particularly effective.

REPUBLIC OF KOREA
should consider tightening borrower-based measures that constrain leverage for real-estate
purchases if lending growth in the household segment does not relent, while being mindful of any
possible impacts on short-term growth and household credit market inclusion. Measures could
include applying the DSR ceiling at the individual borrower level and raising stamp duties and
capital gains taxes for real estate purchases in areas considered overvalued. With banks approaching
their prudential loan-to-deposit ceilings, a more targeted approach to tilt the composition of credit
away from households could also be considered by further reducing the weight applied to corporate
credit. Where there are concerns about credit inclusion, some borrower-based macroprudential
tools could become more forward-looking in their calibration by factoring in a borrower’s net
present income stream across the entire life cycle. As recommended in the FSAP, a Sectoral
Countercyclical Capital Buffer (SCCyB) should be introduced (set at zero initially) to augment the
existing macroprudential toolkit. The buffer could be activated in case of further widening leverage
gaps, to help strengthen banking sector resilience against household debt risks. 14
Real Apartment Price Growth: The Effect of Tighter Macroprudential Measures
Source: IMF staff calculations.

Notes: Panels show the probability density functions for the year-on-year growth in real apartment prices nationwide (left) and
in Seoul (right). X-axis: Annual percent change in real apartment prices, one year ahead. Baseline: The estimated unconditional
distribution. Macropru: The baseline plus the estimated effect of a 10 point tightening in LTV and DTI limits. Estimation sample:
1992Q4-2019Q1.
36. Realigning supply-demand balance in the housing market will require complementing
macroprudential curbs with further steps to boost supply. Staff welcomes the authorities’ efforts
to increase housing supply and improve urban infrastructure and transport connectivity in rural
areas to alleviate demand pressures in prime neighborhoods. Further measures to increase housing
supply in metropolitan areas through facilitating greater involvement of the private sector should be
prioritized, including through easing price caps on pre-construction apartment sales and
streamlining regulatory requirements.
14
See Republic of Korea: Financial Sector Assessment Program-Technical Note-Macroprudential Policy Frameworks and
Tools: https://www.imf.org/en/Publications/CR/Issues/2020/09/18/Republic-of-Korea-Financial-Sector-Assessment-
Program-Technical-Note-Macroprudential-Policy-49749.

REPUBLIC OF KOREA
Impact of Borrower-Based Macroprudential Policies on Household Debt Default Risks
Double Trigger of Mortgage Default Household Probability of Default
1
.8
.8
Predicted Mean
.6
Predicted Mean
.6
.4
.4
.2
.2 .4 .6 .8 1
.2
ltv
40 60 80 100
DTI
DTI=40 DTI=60
DTI=80 DTI=100 dsr=20 dsr=30
DTI=120 dsr=40 dsr=50
Source: IMF staff calculations.

Notes: Panels show the Korean household probability of debt default based on micro household balance sheet data for different
balance sheet leverage indicators; debt service ratio, loan-to-value, and debt-to-income ratios. The data shows that higher LTV, DSR
and DTI ratios are associated with a greater probability of debt default for households. Macroprudential policies that therefore
constrain these ratios will lower debt default risks for households.
37. Efforts to strengthen systemic resilience and address risks in the non-bank sector
should continue. In line with FSAP recommendations, continued strengthening of the prudential
and supervisory approach for policy banks will be important given their prominent role in the crisis
response through expanded lending to adversely affected sectors. Given remaining downside risks
and the importance of capital buffers for loss absorption and credit supply, staff welcomes the
authorities’ supervisory guidance for banks on limiting dividend distributions, based on stress test
results, through H1-2021. Risks related to asset managers are being addressed through the
prudential tightening in their leverage and liquidity ratios, the introduction of mandatory stress
testing, and approval of the Consumer Protection Act to reduce the incidence of mis-selling of
structured products. As COVID-19 potentially accelerates asset managers’ diversification strategies,
these regulations should be revisited and adjusted as market conditions dictate. Finally, the current
supportive financial conditions provide a window of opportunity to remove the ban on short selling,
as this would improve price discovery, and re-sensitize and improve the ability of market
participants to manage their risk-taking. Concerns about equitable access for all investors are most
efficiently addressed through strengthening of sanctions for violations, stepping up monitoring, and
enhancing the role of market-makers in providing opportunities for retail investors to participate in
short-selling.
38. The authorities noted that they would continue to closely monitor financial stability
risks and further tighten prudential policies if necessary. The authorities view household debt as
a significant risk to financial stability, noting that the recent tightening of regulations on unsecured
lending was driven partly by concerns that such borrowing was being used as financing for the

REPUBLIC OF KOREA
equity market. The authorities remained concerned about the rapid growth of mortgage loans and
housing prices in some areas despite an already relatively tight macroprudential policy stance. They
acknowledged the importance of complementing macroprudential policies with measures that
expand housing supply, particularly in the Greater Seoul area, such as those announced in August
2020 and February 2021. However, they did not view the easing of price ceilings on apartment pre-
sales as an effective tool to spur housing supply, viewing these restrictions also as a tool to
preserving housing affordability. In this context, the government has introduced a new measure—
provision of incentives for landowners—to promote supply in urban areas.
39. The authorities concurred with the staff assessment that the overall financial system
remains resilient, while remaining committed to addressing remaining vulnerabilities
promptly. They acknowledged the importance of banks maintaining strong capital positions to deal
with any possible weakening of asset quality when credit support is phased out, extending the
supervisory guidance that limits dividend distribution for banks shortly after the conclusion of the
Article IV discussions. The authorities believe their plan to address FX risks arising from structured
financial products and activities of non-bank financial firms will help make the market more resilient
to episodes of external stress. Finally, the authorities indicated that they are taking steps to level the
playing field between retail investors and institutional investors, prior to the planned lifting of the
short-selling ban in May.
40. The authorities agreed with staff on the need to maintain credit facilities until the
economic recovery is firmed up. Despite the normalization in credit markets, the authorities are
committed to using the remaining room under existing support facilities and if necessary, expanding
some facilities like the BILSF and enhancing the attractiveness of others to avoid a premature
tightening of credit, especially for SMEs.
D. Structural Policy
41. The main structural priorities are to reposition the economy for shifts in the post-
pandemic environment while ensuring vulnerable groups are protected. Against the backdrop
of possible post-COVID structural shifts in the composition of demand, an environment conducive
to the reallocation of resources will be critical to allow dynamic new firms and industries to absorb
labor and capital from areas where demand is sluggish. This calls for addressing longstanding
rigidities in Korea’s product and labor markets. Meanwhile, to avoid exacerbating existing
inequalities amidst a rapid pace of change, social safety nets should be strengthened to protect the
vulnerable.
42. The KND seeks to foster new growth drivers in the post-COVID environment, increase
inclusiveness, and make economic activity greener (Box 2). These objectives are consistent with
addressing some of the above challenges. The aim to promote digitalization throughout the
economy should help close longstanding productivity gaps in the services sector, especially among
small firms. Given the size of government spending on the KND relative to the macroeconomy (one
percent of GDP per year), complementary steps to induce large-scale private investment in support

REPUBLIC OF KOREA
of the KND’s objectives will be critical to realize a significant growth impact. To that end, the
authorities have created a New Deal Fund that will invest private and public funds in priority projects
and sectors and established a task force to identify and pursue implementation of legal and
institutional reforms to facilitate the KND’s objectives.
43. The KND should be complemented with a set of broader structural reforms that can
provide an additional boost to potential growth. This includes further efforts at lowering legal
barriers to entry and startup costs, and simplifying complex and burdensome regulations, which
would create a more favorable environment for investment by younger firms in emerging industries
such as digital medicine and biotechnology. These reforms, along with lowering regulatory barriers
to competition, would facilitate job-rich growth
in the services sector more broadly where
productivity growth has lagged that of the
manufacturing sector and of advanced-
economy peers, resulting in a relatively small
share of skill-intensive services in total
employment and activity (text figure). 15 Korea
has also made efforts to enhance growth
prospects through deeper integration in
regional supply chains through its planned
participation in the Regional Comprehensive
Economic Partnership and is discussing several
additional free trade agreements.
44. The authorities have strengthened the insolvency system and could take additional
steps to facilitate post-pandemic corporate restructuring. The FSAP found Korea’s insolvency
framework generally capable of efficient corporate reorganization and debt restructuring. 16
Welcome measures have been taken recently to broaden access to the simplified insolvency process
for SMEs and accord seniority to post-commencement financing when a firm enters liquidation. To
cope with a potential rise in cases as temporary support programs taper off, further helpful steps
would include promoting out-of-court solutions under the Corporate Restructuring Promotion
Act—which are not widely utilized, developing indicators for triage of SMEs and standardized
options for their resolution, and adopting pending FSAP recommendations to clearly delineate
duties of directors and bar ipso facto clauses in executory contracts.
15
See Republic of Korea: 2019 Article IV Consultation, IMF Country Report No. 19/132.
16
See Republic of Korea: Financial Sector Assessment Program-Technical Note-Insolvency and Creditor Rights:
https://www.imf.org/en/Publications/CR/Issues/2020/09/18/Republic-of-Korea-Financial-Sector-Assessment-
Program-Technical-Note-Insolvency-and-Creditor-49748.

REPUBLIC OF KOREA
45. The COVID-19 shock has underscored the importance of strengthening the social
safety net and reducing labor market duality. With employment falling more among “non-
regular” workers, who are also more likely to be young or female, the shock could exacerbate
existing inequalities (text figure). Temporary interventions during the pandemic helped to mitigate
these effects, while illustrating the need for
permanent reforms. In this regard, welcome
steps are being taken to broaden coverage of
basic livelihood security programs and the
employment insurance system, and to increase
job matching assistance through allowances
and training as planned in the KND. These
measures will complement previous efforts to
make growth more inclusive (through increased
minimum wages, earned-income tax credits,
and basic pensions) and have the added benefit
of strengthening Korea’s automatic stabilizers.
Reducing labor market rigidity by making regular contracts more flexible remains a critical need. 17
This can be pursued once the economy recovers or alternatively flexibility could be applied only to
new hires to facilitate implementation.
46. Enhancing carbon pricing will be important to help deliver on the green pillar of the
KND and achieve Korea’s broader climate objectives. Korea has pledged to cut greenhouse gas
emissions by 37 percent below the “Business as Usual” baseline by 2030 and aims to become carbon
neutral by 2050. Achieving the 2030 pledge will require a substantial increase in allowance prices in
Korea’s emissions trading system from current levels of about $20/ton. 18 Pricing can be enhanced by
aligning emissions caps with the 2030 mitigation target and underpinning the system with a robust
and rising price floor. Additional revenue from higher carbon pricing and greater auctioning of
allowances could be used to compensate vulnerable groups for higher energy prices, support R&D
and investment in climate-smart technology, and lower the tax burden on labor and capital
income. 19 The KND includes several measures to increase the shares of renewable power generation
and electric vehicles, improve energy efficiency of infrastructure, and support innovation in green
industry. While most of these measures involve public investment or subsidies, further steps could
reinforce incentives for mitigation and green investment. Revenue-neutral fee/rebate schemes for
vehicles and power generators with above/below average emission rates could play a key role,
without imposing a tax burden on the average household or firm or fiscal cost to the government.
17
See J. Schauer, “Labor Market Duality in Korea,” IMF Working Paper WP/18/126.
18
See the Selected Issues Paper “Fiscal Policies to Strengthen Korea’s Climate Mitigation Strategy” for further detail.
19
Strengthened carbon pricing would also lessen the likelihood of border adjustments applied by the EU to Korean
exports.

REPUBLIC OF KOREA
47. The authorities emphasized the potential boost to growth from the KND and
acknowledged the desirability of complementary product market reforms. The KND is viewed
as helping the economy capitalize on the rising role of digitalization and foster other new growth
drivers in the services sector. The authorities underscored enhancements to corporate governance
and the overall competitive environment from recent reforms to the Commercial Act and the Fair
Trade Act. They saw regulatory sandboxes as an effective method to spur innovation and noted
ongoing efforts to identify other areas for streamlining regulations.
48. The authorities agreed with staff on the importance of strengthening the social safety
net and reducing labor market duality. With the increase in welfare-related spending in recent
years and the assistance measures deployed in 2020, they view progress as substantial, and aim to
further expand the coverage of social safety programs going forward. Considering COVID-19 is
threatening employment stability, the authorities stressed that policy measures aiming at labor
market stability should be prioritized over those to increase flexibility, as the latter were best
pursued once the economy had recovered from the COVID-19 shock and would require intense
dialogue between the government, labor unions and corporate representatives.
49. On climate change, the authorities appreciated staff’s analysis of possible tools to
strengthen mitigation policies. They acknowledged the importance of carbon pricing to achieve
Korea’s climate goals but noted that the required increase would be more moderate than implied in
the stylized staff calculations as additional mitigation tools can be deployed. In this context, they are
assessing the macroeconomic impact of various possible mitigation policies.
STAFF APPRAISAL
50. Korea has weathered the COVID-19 pandemic shock comparatively well. The authorities
appropriately used available policy space to counter the macro-financial effects of the COVID-19
pandemic. The comprehensive policy response was facilitated by Korea’s sound macroeconomic
fundamentals entering the shock and helped to cushion the impact on affected households and
firms, limit market volatility, and sustain credit flows. This contributed to keeping Korea’s downturn
modest relative to peers.
51. The economy is recovering, albeit in an uneven manner. In the near term, the economy is
projected to grow at an above-trend rate, from a starting point of substantial economic slack.
Exports, investment, and manufacturing have recovered more quickly than activity in the services
sector and employment. There is larger-than-usual uncertainty surrounding the outlook, centered
on the pace of re-opening and vaccination progress, both domestic and externally.
52. Against this backdrop, the policy priorities for the period ahead are to nurture the
recovery and solidify the foundations for resilient, greener, and more inclusive growth. Near-
term fiscal and monetary policies could be more accommodative than implied in the authorities’
current plans. This would help the economy normalize faster, sustain affected small businesses, and
bring discouraged workers back into the labor market.

REPUBLIC OF KOREA
53. Fiscal policy should aim at a more expansionary stance in 2021 than implied by the
budget. There is scope for raising targeted transfers to adversely affected workers and firms and
accelerating public investment plans in 2021 to support the recovery, aiming for a fiscal stance that
is modestly positive or at least neutral in terms of the overall contribution to the economy. This
expansion can be offset by gradual consolidation in subsequent years. The government has taken a
welcome initiative to anchor the public finances in a rules-based framework. Successful
implementation of the proposed framework will require putting in place an effective mechanism to
enable counter-cyclical policies in the event of typical downturns.
54. Monetary policy was appropriately eased in 2020 and there is merit for some
additional accommodation to help underpin the recovery and bring inflation closer to the
BOK’s target. This could be achieved through a number of instruments, including a modest further
policy rate easing, forward guidance on the likely course of monetary policy, and facilities targeted
toward supporting credit to SMEs.
55. The exchange rate should continue to move flexibly, with intervention limited to
preventing disorderly market conditions. Prudential measures taken to strengthen FX liquidity
management of non-banks and the establishment of a FX repo facility by the BOK are welcome
steps to strengthen systemic resilience against FX funding shocks. Preliminary analysis, adjusting for
transitory factors, suggests that the external position in 2020 was broadly in line with the level
implied by medium-term fundamentals and desirable policies.
56. Given the lingering impact of the pandemic, the authorities are appropriately avoiding
a premature winding down of credit support programs, especially for SMEs. As the economy
recovers more broadly, the focus of policy interventions should shift from liquidity provision to
measures that promote corporate restructuring and solvency support.
57. The financial system has remained resilient overall and macroprudential policies
appear appropriately set to mitigate risks. While several factors mitigate risks to financial stability
from high household debt, the authorities should be prepared to tighten policies further if
household credit continues rising sharply. The authorities’ cautious approach to dividend
distributions by banks has helped preserve capital buffers for credit supply. Resuming short selling
in the equity market would enhance price discovery and re-sensitize investors to two-way risks,
while retail investor protection is best addressed through the strengthening of regulation, which the
authorities are pursuing.
58. The KND represents a welcome strategy to develop new growth drivers and increase
inclusiveness. Complementary reforms to reduce entry barriers, stimulate innovation, and tackle
remaining labor market rigidities can provide a further boost to potential growth. Strengthening
carbon pricing to provide robust incentives for green investment will also be important to achieve
the objectives of the green pillar of the KND and Korea’s ambitious mitigation goals.
59. It is recommended that the next Article IV consultation be held on the standard 12-
month cycle.

REPUBLIC OF KOREA
Table 1. Korea: Selected Economic Indicators, 2018–26
Projections
2018 2019 2020 2021 2022 2023 2024 2025 2026
Real GDP (percent change) 2.9 2.0 -1.0 3.4 2.9 2.6 2.4 2.3 2.3
Total domestic demand 2.0 1.2 -1.3 1.9 3.3 2.6 2.4 2.2 2.2
Final domestic demand 1.7 1.1 -0.8 1.9 3.3 2.6 2.4 2.3 2.2
Consumption 3.7 2.9 -2.4 1.2 4.0 2.6 2.4 2.3 2.3
Gross fixed investment -2.2 -2.8 2.6 3.2 2.0 2.6 2.4 2.1 1.9
Stock building 1/ 0.3 0.2 -0.5 0.1 0.0 0.0 0.0 0.0 0.0
Net foreign balance 1/ 1.0 1.0 0.4 1.6 -0.3 0.2 0.2 0.2 0.3
Potential output 2.7 2.6 1.0 2.5 1.9 2.0 2.1 2.2 2.3
Output gap (percent of potential GDP) -0.3 -0.8 -2.7 -1.8 -0.9 -0.3 -0.1 0.0 0.0
Saving and investment (in percent of GDP)

Gross national saving 36.0 35.0 36.2 36.6 35.8 35.7 35.7 35.7 35.6
Gross domestic investment 31.5 31.3 31.6 32.8 32.0 31.7 31.5 31.4 31.3
Current account balance 4.5 3.6 4.6 3.8 3.9 4.1 4.2 4.2 4.3
Prices (percent change)
CPI inflation (end of period) 1.3 0.7 0.5 1.2 1.0 1.3 1.5 1.7 2.0
CPI inflation (average) 1.5 0.4 0.5 1.4 0.8 1.3 1.5 1.7 2.0
Core inflation (average) 1.2 0.7 0.4 … … … … … …
GDP deflator 0.5 -0.9 1.1 0.0 0.7 1.2 1.6 1.6 1.8
Real effective exchange rate 1.0 -4.6 -1.9 … … … … … …
Consolidated central government (in percent of GDP)
Revenue 22.9 23.0 22.9 22.8 23.0 23.1 23.2 23.3 23.3
Expenditure 20.4 22.6 25.7 25.1 25.5 25.7 25.7 25.6 25.3
Net lending (+) / borrowing (-) 2.6 0.4 -2.8 -2.2 -2.5 -2.6 -2.5 -2.3 -2.1
Overall balance 1.6 -0.6 -4.2 -3.6 -3.9 -3.9 -3.7 -3.5 -3.1
Excluding Social Security Funds -0.6 -2.8 -6.1 -5.5 -5.8 -5.8 -5.5 -5.2 -4.8
Cyclically-adjusted balance 2.6 0.6 -2.1 -1.8 -2.3 -2.5 -2.4 -2.3 -2.1
Fiscal impulse (+ is expansionary) -0.3 2.1 2.6 -0.3 0.5 0.2 -0.1 -0.1 -0.3
General government debt 40.0 42.2 48.7 52.8 57.0 60.9 64.3 67.3 69.6
Money and credit (end of period)
Overnight call rate 1.9 1.4 0.5 … … … … … …
Three-year AA- corporate bond yield 2.3 1.9 2.2 … … … … … …
Credit growth 7.9 9.0 9.2 4.3 4.0 3.9 3.9 4.0 4.1
Balance of payments and external balance sheet (in billions of U.S. dollars)
Exports, f.o.b. 626.3 556.7 516.6 596.9 615.7 643.6 678.0 715.4 752.6
Imports, f.o.b. 516.2 476.9 434.7 518.1 529.6 550.0 576.4 609.1 641.6
Export volumes (percent change) 3.3 0.5 -0.5 10.5 3.1 3.7 3.4 3.3 3.3
Import volumes (percent change) 2.0 -0.8 0.0 7.7 4.5 3.9 3.6 3.3 3.1
Gross international reserves (end of period) 2/ 398.9 404.0 438.3 440.8 443.2 447.6 451.3 455.0 457.3
In percent of short-term debt (residual maturity) 218.7 207.9 193.3 204.3 200.4 197.4 193.4 190.1 186.6
Total external debt (in percent of GDP) 25.6 28.4 33.3 31.3 31.1 31.0 31.0 31.0 31.0
Sources: National sources; and IMF staff estimates and projections.

1/ Contribution to GDP growth.
2/ Excludes gold.

REPUBLIC OF KOREA
Table 2. Korea: Balance of Payments, 2018–26

(In billions of U.S. dollars, unless otherwise indicated, BPM6 sign)
Projections
2018 2019 2020 2021 2022 2023 2024 2025 2026
Goods balance 110.1 79.8 81.9 78.8 86.1 93.6 101.6 106.3 111.0
Exports 626.3 556.7 516.6 596.9 615.7 643.6 678.0 715.4 752.6
Imports 516.2 476.9 434.7 518.1 529.6 550.0 576.4 609.1 641.6
Services balance -29.4 -26.8 -16.2 -18.7 -21.0 -22.4 -23.4 -23.8 -24.1
Primary income 4.9 12.9 12.1 12.8 13.0 13.9 14.4 14.8 15.9
Secondary income -8.2 -6.1 -2.5 -5.4 -5.7 -5.8 -6.5 -7.0 -7.4
Capital account balance 0.3 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3
Financial account balance 1/ 59.0 57.6 59.7 64.6 69.6 74.5 82.0 86.2 92.6
Portfolio investment 47.4 42.4 41.5 43.7 46.5 49.7 53.1 56.4 61.3
Direct investment 26.0 25.6 23.3 26.0 28.4 30.8 33.7 37.0 40.6
Financial derivatives -1.5 6.2 4.2 -4.5 -3.0 -6.4 2.3 -1.5 -2.6
Other investment -13.0 -16.7 -9.2 -0.6 -2.3 0.4 -7.0 -5.7 -6.7
Net errors and omissions -1.3 -0.5 2.2 0.0 0.0 0.0 0.0 0.0 0.0
Reserves and related items 17.5 1.5 17.4 2.5 2.5 4.4 3.7 3.7 2.4
(In percent of GDP)

Goods balance 6.4 4.8 5.0 4.4 4.6 4.8 5.0 5.0 5.0
Services balance -1.7 -1.6 -1.0 -1.0 -1.1 -1.1 -1.1 -1.1 -1.1
Primary income 0.3 0.8 0.7 0.7 0.7 0.7 0.7 0.7 0.7
Secondary income -0.5 -0.4 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3
Capital account balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Financial account balance 1/ 3.4 3.5 3.7 3.6 3.7 3.8 4.0 4.1 4.2
Portfolio investment 2.7 2.6 2.5 2.4 2.5 2.5 2.6 2.7 2.8
Direct investment 1.5 1.6 1.4 1.5 1.5 1.6 1.7 1.7 1.8
Financial derivatives -0.1 0.4 0.3 -0.3 -0.2 -0.3 0.1 -0.1 -0.1
Other investment -0.8 -1.0 -0.6 0.0 -0.1 0.0 -0.3 -0.3 -0.3
Net errors and omissions -0.1 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0
Reserves and related items 1.0 0.1 1.1 0.1 0.1 0.2 0.2 0.2 0.1
Memorandum items:
Gross reserves minus gold 398.9 404.0 438.3 440.8 443.2 447.6 451.3 455.0 457.3
(in months of imports of
goods and services) 7.4 8.0 9.7 8.4 8.2 8.0 7.7 7.3 7.0
External debt 441.2 467.0 542.4 560.9 582.2 605.9 631.9 659.2 687.7
(in percent of GDP) 25.6 28.4 33.3 31.3 31.1 31.0 31.0 31.0 31.0
Short-term external debt
(inc. trade credits) 125.6 134.5 157.5 162.4 167.9 173.4 180.0 186.1 191.8
Sources: National sources; and IMF staff estimates and projections.

1/ Excludes reserves and related items.

REPUBLIC OF KOREA
Table 3. Korea: Statement of Central Government Operations, 2018–26
Estimates Projections
2018 2019 2020 2021 2022 2023 2024 2025 2026
(In trillions of won)
Revenue 435.6 441.1 440.3 454.1 474.6 494.4 516.8 537.7 560.3
Tax revenue 293.6 293.5 285.5 298.0 311.9 324.9 339.8 353.5 368.4
Social contributions 76.6 80.5 81.6 84.4 89.2 92.5 96.2 100.1 104.2
Of which: Social security contributions 64.9 69.6 74.5 76.1 80.4 83.4 86.7 90.2 94.0
Other revenue 65.3 67.2 73.3 71.7 73.6 77.0 80.8 84.1 87.7
Expenditure 386.9 434.0 493.3 498.2 526.0 549.7 571.7 591.5 610.0
Expense 377.9 407.9 484.7 489.8 517.6 541.4 563.3 583.2 601.7
Net acquisition of nonfinancial assets 9.0 26.1 8.6 8.4 8.3 8.3 8.3 8.3 8.3
Less: Policy lending 17.5 19.2 27.0 27.2 28.7 28.5 28.1 26.3 24.4
Overall balance 31.2 -12.0 -79.9 -71.2 -80.0 -83.7 -83.0 -80.2 -74.1
Less: Social Security Fund (SSF) balance 41.7 42.4 37.0 38.7 40.3 40.1 40.1 40.5 40.9
Managed balance
(overall balance excl. SSF) -10.6 -54.4 -117.0 -110.0 -120.3 -123.8 -123.0 -120.6 -115.0
(In percent of GDP)

Revenue 22.9 23.0 22.9 22.8 23.0 23.1 23.2 23.3 23.3
Tax revenue 15.5 15.3 14.9 15.0 15.1 15.2 15.3 15.3 15.3
Social contributions 4.0 4.2 4.2 4.2 4.3 4.3 4.3 4.3 4.3
Of which: Social security contributions 3.4 3.6 3.9 3.8 3.9 3.9 3.9 3.9 3.9
Other revenue 3.4 3.5 3.8 3.6 3.6 3.6 3.6 3.6 3.6
Expenditure 20.4 22.6 25.7 25.1 25.5 25.7 25.7 25.6 25.3
Expense 19.9 21.3 25.2 24.6 25.1 25.3 25.3 25.2 25.0
Net acquisition of nonfinancial assets 0.5 1.4 0.4 0.4 0.4 0.4 0.4 0.4 0.3
Less: Policy lending 0.9 1.0 1.4 1.4 1.4 1.3 1.3 1.1 1.0
Overall balance 1.6 -0.6 -4.2 -3.6 -3.9 -3.9 -3.7 -3.5 -3.1
Less: Social Security Fund balance 2.2 2.2 1.9 1.9 2.0 1.9 1.8 1.7 1.7
Managed balance
(overall balance excl. SSF) -0.6 -2.8 -6.1 -5.5 -5.8 -5.8 -5.5 -5.2 -4.8
(In percent of GDP)

Memorandum items:
Primary balance 2.1 -0.1 -3.3 -2.6 -2.7 -2.7 -2.5 -2.2 -2.2
Cyclically adjusted balance 2.6 0.6 -2.1 -1.8 -2.3 -2.5 -2.4 -2.3 -2.1
Central government debt 34.3 36.4 43.2 47.3 51.5 55.4 58.8 61.8 64.1
General government debt 40.0 42.2 48.7 52.8 57.0 60.9 64.3 67.3 69.6
Sources: Ministry of Economy and Finance; and IMF staff estimates and projections.

REPUBLIC OF KOREA
Table 4. Korea: Financial Soundness Indicators
2017 2018 2019 2020 1/

Banks
Capital to assets 8.0 8.0 7.8 7.4
Regulatory capital to risk-weighted assets 15.2 15.4 15.3 14.6
Regulatory Tier 1 capital to risk-weighted assets 13.1 13.3 13.2 12.7
Non-performing loans net of provisions to capital 1.7 1.3 1.2 1.2
Non-performing loans to total gross loans 0.4 0.3 0.3 0.2
Return on assets 0.7 0.8 0.7 0.7
Return on equity 8.5 9.8 8.9 9.3
Interest margin to gross income 58.7 72.7 76.2 65.9
Non-interest expenses to gross income 65.6 75.5 75.2 56.6
Liquid assets to total assets (liquid asset ratio) 29.9 31.2 32.2 33.0
Liquid assets to short term liabilities 101.2 114.5 110.0 101.9
FX dominated loans to total loans 10.9 10.9 11.0 11.6
Net open position in foreign exchange to capital -0.98 0.04 0.11 -0.30
Net equity position to capital 21.8 21.4 21.0 21.3
Non-bank Financial Institutions

Assets to total financial system assets 19.8 19.8 21.1 21.1
Source: National authorities.
1/ 2020-Q2.

REPUBLIC OF KOREA
Annex I. Follow-Up on Past IMF Recommendations
2019 Article IV Consultation Actions Since 2019 Article IV

Recommendations Consultation
Fiscal policy should remain

Fiscal policies have been expansionary, as the
expansionary into the medium term to
overall balance declined by 2.2 percent of GDP in
support growth, job creation and
2019 and another 3.5 percent of GDP in 2020.
external rebalancing.
The basic pension was increased and an

unemployment benefit for youth was introduced.
Fiscal
Strengthen social safety nets and The Korean New Deal envisages plans to increase
policies
active labor market programs. the coverage of employment insurance and basic
livelihood security programs, as well as job
training programs.
After the increase in corporate and personal

Greater revenue mobilization to
income tax rates in 2018, the top personal income
prepare for the aging population.
tax rate will further rise from 42% to 45% in 2021.
Monetary policy should remain The policy rate was cut in four steps between July
Monetary accommodative. 2019 and May 2020 by 125 basis points in total.
and
financial Financial risks should be managed Prudential limits on mortgage loans and
policies through macroprudential policies, unsecured household lending have been
rather than monetary policy. tightened.
Increased coverage of employment insurance is

Enhance flexibility and security planned under the Korean New Deal. Regarding
(flexicurity) in the labor market to flexibility, hours worked limits have been
mitigate duality and foster private tightened. There have been no major changes to
sector job creation. the restrictive employment protections applied to
workers on open-ended contracts.
The minimum wage increased by 2.9 percent in

Structural Better align minimum wage increases 2020 and 1.5 percent in 2021, broadly in line with
policies with labor productivity growth. productivity growth, following a 10.9 percent
increase in 2019.
The Korean New Deal aims to foster new drivers

Diversify the manufacturing sector and
of growth through investment in the digital and
liberalize the services sector, by easing
green economy and streamlining of applicable
the regulatory burden on firms,
regulations. The overall regulatory environment,
lowering barriers to entry, and
including that applicable to services, broadly
reducing protections to existing firms.
continues in place.

REPUBLIC OF KOREA
Annex II. Key Economic Policies in Response to COVID-19

Budgetary Fiscal Measures
• Supplementary budgets in 2020. Four supplementary budgets approved for a net total of
2.9 percent of GDP:
- March 17 (0.6 percent of GDP, net): Spending on disease prevention and treatment, loans
and guarantees for affected businesses, and support for affected households and local
economies.
- April 30 (0.4 percent of GDP, net): Emergency relief transfers to households.
- July 3 (1.4 percent of GDP, net): Spending on credit support programs, wage support
programs for firms, COVID-19 health response, and Korean New Deal projects, among other
measures; downward adjustment in revenue projection.
- September 22 (0.4 percent of GDP, net): Spending to support SMEs, employment, low-
income households, and daycare costs, among other measures.
• Emergency transfers from 2021 budget. December 29, 2020 (0.5 percent of GDP, zero net as it
was a reallocation within the 2021 budget). Emergency relief transfers to firms and workers.
Monetary Policy
• Policy interest rate. Reduced by 75 basis points to 0.5 percent in two steps (March and May).
• Liquidity provision. Repo operations available in unlimited amounts at the policy rate plus
10 basis points (April-July). Eligible participants and securities for repos and open market
operations were temporarily expanded.
• Bond purchases. BOK acquired KRW 6 trillion in four one-off purchases (March-August 2020) and
KRW 5 trillion under a plan announced for September-December 2020. Announced plans to
acquire up to KRW 7 trillion in February-June 2021.
Support for Credit and Financial Markets
• Small business/SME lending and guarantee programs. Various programs through policy banks
and commercial banks for up to KRW 65.5 trillion (initiated February-May 2020, expanded
January 2021). BOK increased ceiling on bank-intermediated SME lending facility by
KRW 18 trillion in three steps (March, May, and October).
• Bond market stabilization fund. Invest up to KRW 10 trillion in corporate bonds, bank
debentures, and commercial paper, with option of expanding to KRW 20 trillion (April). Other
measures to support fixed-income securities markets include liquidity support for securities
firms, programs for corporate bond underwriting and refinancing, and support of primary
collateralized bond obligation issuance.

REPUBLIC OF KOREA
• Corporate bond-backed lending facility. Temporary BOK facility to provide loans to financial
institutions with high-quality bonds as collateral, up to KRW 10 trillion (April).
• Special purpose vehicle for fixed-income instruments. Funded by Korea Development Bank and
BOK, to purchase corporate bonds, commercial paper, and short-term debts. Instruments with
credit ratings from AA to BBB are eligible. Established for KRW 10 trillion, can be expanded to up
to KRW 20 trillion (July).
• Equity market stabilization fund. Invest up to KRW 10.7 trillion in equities, funded by public and
private financial institutions (April).
• Key industry stabilization fund. Established fund to provide support of up to KRW 40 trillion
through loans, payment guarantees, and other investments under conditions that could include
maintaining employment, limiting dividend payouts, and restructuring, among others (May).
• Trade financing. Extend maturity of trade credit and raise ceiling for export insurance, among
other measures, for a total of up to KRW 36 trillion (April).
• Regulatory measures. Temporarily permitted loan-to-deposit ratio above regulatory ceilings for
various institutions (April 2020-June 2021). Temporarily lowered total liquidity coverage ratio to
85 percent from 100 percent (April 2020-March 2021). Temporarily prohibited short selling of
equity shares (March 2020-May 2021).
FX Funding
• Fed swap line. Swap line with U.S. Federal Reserve for US$60 billion (March).
• Leverage cap on FX derivative positions for banks. Raised existing limits by 25 percent (March).
• Levy on financial institutions’ non-deposit FX liabilities. Temporarily set at zero (April-June).

• FX liquidity coverage ratio. Temporarily lowered to 70 percent from 80 percent (April 2020-
March 2021).
• BOK repo facility. Created a facility to be activated in times of stress, for financial institutions to
repo FX-denominated securities with the BOK.

REPUBLIC OF KOREA
Annex III. External Stability Assessment

Overall Assessment: On a preliminary basis, and adjusting for transitory factors, recent developments suggest that the external position in
2020 remained broadly in line with the level implied by medium-term fundamentals and desirable policies. The CA surplus widened from the
2019 level on account of a recovery in exports, lower oil prices, and narrowing of the service sector deficit, and is projected to narrow slightly
over the medium term as domestic demand recovers and transitory factors related to the COVID-19 shock recede. However, this
assessment is subject to uncertainty given the preliminary nature of data for 2020 and the impact of the COVID-19 crisis. The final
assessment will be provided in the 2021 External Sector Report.
Potential Policy Responses: To support activity following the COVID-19 outbreak, the authorities have deployed fiscal and monetary
stimulus, of which a substantial part is expected to be temporary. Ensuring that the external position remains in line with medium-term
fundamentals will require continued accommodative fiscal and monetary policies, as well as structural policies to stimulate investment and
facilitate rebalancing of the economy toward services and other new growth drivers. Desirable reforms include reducing barriers to firm entry
and investment, deregulating the non-manufacturing sector, and strengthening the social safety net to lessen the need for precautionary
saving across sectors. Reforms in some of these areas are contained in the authorities’ Korean New Deal, to be implemented over the next
five years. The exchange rate should remain market determined, with intervention limited to preventing disorderly market conditions.
Foreign Asset Background. The NIIP has been positive since 2014. Data for 2020 imply that Korea’s NIIP was 27.1 percent of GDP,
and Liability with gross liabilities at 91.8 percent of GDP, of which around one-third was gross external debt. The NIIP declined by
Position and about 3 percent of GDP from the 2019 level, largely reflecting valuation effects resulting from a sharp rally in domestic
Trajectory equity prices in the second half of 2020. The NIIP is projected to rise to about 50 percent of GDP in the medium term, on
the back of CA surpluses and search-for-yield activity by financial institutions driven by asset accumulation for old-age
consumption.
Assessment. The positive NIIP is a source of external sustainability. Foreign asset holdings are diversified, with around
43 percent held in equity or debt securities. About 60 percent of foreign assets are denominated in U.S. dollars, implying
won depreciation could have positive valuation effects. The structure of liabilities limits vulnerabilities, with equity and
direct investment accounting for around 60 percent of total liabilities.
2020 (% GDP) NIIP: 27.1 Gross Assets: 118.9 Debt Assets: 27.3 Gross Liab.: 91.8 Debt Liab.: 29.2
Current Background. The CA surplus in 2020 widened to 4.6 percent of GDP from 3.6 percent in 2019, driven by a rebound in
Account exports since 2020:Q3 and a narrowing of the services deficit due to COVID-19 travel restrictions. The CA surplus has
been trending down from the peak of 7.2 percent of GDP in 2015, reflecting a fall in savings, particularly for the
household sector, and increase in the investment-to-GDP ratio. Over the medium term, the CA surplus is projected to
narrow slightly to 4.3 percent of GDP as export demand and the service sector balance normalize.
Assessment. The EBA model estimates the cyclically adjusted CA to be 4.4 percent of GDP. The CA norm is estimated
at 3.6 percent of GDP, with a standard error of 0.9 percent of GDP. After accounting for transitory factors arising from the
COVID-19 shock (in the tourism and oil sectors), staff estimates the 2020 CA gap midpoint to be 0.0 percent of GDP. The
relative policy gap contribution is estimated at 1.9 percent of GDP, however this is driven mainly by large exceptional
fiscal stimulus in the rest of the world relative to Korea, and not expected to persist over the medium term.
2020 (% GDP) CA: 4.6 Cycl. Adj. CA: 4.4 EBA Norm: 3.6 EBA Gap: 0.8 COVID-19 Adj.: -0.8 Other Adj.: 0.0 Staff Gap: 0.0
Real Exchange Background. Following sustained appreciation during 2015–18, the REER depreciated in 2019 by around 4.5 percent,
Rate with the REER returning to its 2015 level. The REER depreciated further in the first half of 2020 before recovering
somewhat more recently. Overall, the average REER for 2020 has depreciated by about 2 percent relative to the 2019
average.
Assessment. The staff CA gap implies a REER gap of 0 percent (applying an estimated elasticity of 0.36). The EBA
REER index model estimates a REER undervaluation of 3.6 percent, while the REER level model estimates a 11.8
percent undervaluation. Staff uses the estimated CA gap for its assessment given the better fit of the EBA CA model.
Consistent with the staff CA gap, staff assesses the REER to be in the range of -3 to 3 percent with a midpoint of 0.
Capital and Background. Net FDI and portfolio outflows have declined since 2017, when outflows peaked at 4.6 percent of GDP.
Financial Portfolio outflows were 3.6 percent of GDP in 2020, reflecting further portfolio diversification and institutional investors’
Accounts: continued search for yield. Net FDI and portfolio outflows comprised the bulk of the 2020 financial account (1.4 and 2.5
Flows percent of GDP, respectively), whereas other investments (net) recorded inflows (0.6 percent of GDP). Despite non-
and Policy resident equity outflows in the first half of the year, overall capital flows have remained relatively stable in 2020,
Measures supported by portfolio debt inflows and a slowdown in outward FDI.
Assessment. The present configuration of net and gross capital flows appears sustainable over the medium term. In
recent years, including in the context of the COVID-19 shock, Korea has demonstrated ample capacity to absorb short-
term capital flow volatility.
FX Intervention Background. Korea has a floating exchange rate. FX intervention appears to have been two-sided since early 2015,
and Reserves based on staff estimates and published data. As of end-2020, reserves stood at 27 percent of GDP reflecting legacy
Level accumulation with valuation gains in 2020 from non-USD denominated assets. FX intervention data released by the Bank
of Korea shows that it sold a net US$5.9 billion (0.4 percent of GDP) in the first quarter of 2020 amidst depreciation
pressures on the won. Net intervention was close to zero in the second and third quarter. During March-May 2020, the
Bank of Korea temporarily drew US$20 billion from the US$60 billion swap line established with the Federal Reserve.
Assessment. Since 2015, intervention appears to have been limited to preventing disorderly market conditions. As of
end-2020, FX reserves were around 115 percent of the IMF’s composite reserve adequacy metric which, together with
access to the Federal Reserve swap facility, provides enough buffer against a wide range of possible external shocks.

Risks Likelihood Impact of Risk Policy Response
probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent).
of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a
1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view
(High, Medium, Low)

Unexpected shift in the Covid-19 pandemic.
Downside. Medium High (downside): Recovery Provide additional fiscal support to
• Asynchronous progress. Limited access to, and longer- would be more uneven and affected firms and workers; further
than-expected deployment of, vaccines in some countries— scarring deeper. Need for ease monetary policy, including
combined with dwindling policy space—prompt a greater fiscal and monetary through larger asset purchase program
reassessment of their growth. support could exhaust policy to support liquidity in bond markets
Annex IV. Risk Assessment Matrix1

space. and the transmission of monetary
• Prolonged pandemic. The disease proves harder to
policy; provide liquidity support to
eradicate (e.g., due to new virus strains, short effectiveness
banks; expand financial facilities in
of vaccines, or widespread unwillingness to take them),
place to maintain credit flows.
requiring costly containment efforts and prompting
persistent behavioral changes rendering many activities
unviable. For countries with policy space, prolonged
support—while needed to cushion the economy—
exacerbates stretched asset valuations, fueling financial
vulnerabilities.
Upside. Medium Medium (upside): Strong Begin process of unwinding crisis

• Faster containment. Pandemic is contained faster than confidence impact in the near measures while avoiding a hasty
expected due to the rapid production and distribution of term; activity recovers faster withdrawal of support that risks
vaccines, boosting confidence and economic activity. than expected over the undermining the recovery
INTERNATIONAL MONETARY FUND
medium term and limits

scarring.
Sharp rise in global risk premia exposes financial and fiscal Medium Medium: Vicious circle of Extend market stabilization measures
vulnerabilities. A reassessment of market fundamentals (e.g., tighter financial conditions, already in place; expand BoK asset
in response to adverse Covid-19 developments) triggers a higher risk aversion, purchase program to support liquidity
widespread risk-off event. Risk asset prices fall sharply and deleveraging, and lower in bond markets, compress risk premia,
volatility spikes, leading to significant losses in major non- growth. and strengthen the transmission of
REPUBLIC OF KOREA
monetary policy; and provide liquidity
bank financial institutions. Higher risk premia generate
support to banks.
financing difficulties for leveraged firms (including those
operating in unviable activities) and households, and a wave of
bankruptcies erode banks’ capital buffers. Financing difficulties
extend to sovereigns with excessive public debt, leading to
cascading debt defaults.
39
REPUBLIC OF KOREA
Risks Likelihood Policy Response
40
Impact of Risk
(High, Medium, Low)
Engage in support for the multilateral
INTERNATIONAL MONETARY FUND
Accelerating de-globalization. Despite renewed efforts to Medium Medium: Given that Korea
rules-based trading system and
reach multilateral solutions to existing tensions, geopolitical is an open economy, trade
advocate trade liberalization.
competition leads to further fragmentation. Reshoring and less restrictions to re-shore and
trade reduce potential growth. protect supply chains could
reduce exports and growth.
Domestic Risks
Non-financial corporate (NFC) and/household balance Medium High: Recovery would be Maintain accommodative fiscal and
sheet stress. Around 50 percent of SME debt is at-risk, with more monetary policies. Use
the sector employing around 70 percent of the workforce. uneven and scarring macroprudential policies to limit risks
Household debt is among the highest in the OECD. Balance deeper. to the banking system.
sheet stress could soften house prices and push SMEs into
insolvency, leading to a slowdown in economic growth. This
could result in higher loan delinquencies, lower credit flows,
and additional negative feedback on growth.
Progress in normalizing relations with North Korea (upside Low High: Domestic demand Prepare plans on how to support
risk). Faster than anticipated progress in relations could have could North Korea, in cooperation with the
a positive impact on investment and consumer sentiment. be higher than anticipated. international community.
REPUBLIC OF KOREA
Annex V. Public Debt Sustainability Analysis

Baseline
Figure Scenario
1. Baseline Scenario
(In percent of GDP unless Otherwise Indicated)
(in percent of GDP unless otherwise indicated)
1/
Debt, Economic and Market Indicators
Actual Projections As of February 01, 2021
2/
2009-2017 2018 2019 2020 2021 2022 2023 2024 2025 Sovereign Spreads
Nominal gross public debt 31.2 34.3 36.4 43.2 47.3 51.5 55.4 58.8 61.8 EMBIG (bp) 3/ -
Public gross financing needs 2.7 5.0 8.0 7.1 7.0 6.7 6.3 5.8 5Y CDS (bp) 27
Real GDP growth (in percent) 3.2 2.9 2.0 -1.0 3.4 2.9 2.6 2.4 2.3 Ratings Foreign Local
Inflation (GDP deflator, in percent) 2.0 0.5 -0.9 1.1 0.0 0.7 1.2 1.6 1.6 Moody's Aa2 Aa2
Nominal GDP growth (in percent) 5.3 3.4 1.1 0.1 3.5 3.6 3.8 4.0 4.0 S&Ps AA AA
Effective interest rate (in percent) 4/ 3.2 2.3 2.1 2.0 2.0 2.0 2.0 2.0 2.0 Fitch AA- AA-
Contribution to Changes in Public Debt

Actual Projections
2009-2017 2018 2019 2020 2021 2022 2023 2024 2025 cumulative debt-stabilizing
Change in gross public sector debt 0.9 0.2 2.1 6.8 4.1 4.2 3.9 3.4 3.0 25.3 primary
9/
Identified debt-creating flows 0.1 -0.6 2.5 6.8 4.1 4.2 3.9 3.4 3.0 25.4 balance
Primary deficit 0.3 -1.1 1.1 4.0 3.3 3.5 3.5 3.2 2.9 20.4 0.0
Primary (noninterest) revenue and grants 17.6 19.5 19.4 19.0 19.0 19.1 19.2 19.3 19.4 115.1
Primary (noninterest) expenditure 17.9 18.4 20.5 23.0 22.3 22.7 22.7 22.5 22.3 135.5
Automatic debt dynamics 5/ -0.6 -0.4 0.4 0.7 -0.6 -0.7 -0.9 -1.0 -1.1 -3.7
Interest rate/growth differential 6/ -0.6 -0.4 0.3 0.7 -0.6 -0.7 -0.9 -1.0 -1.1 -3.7
Of which: real interest rate 0.3 0.6 1.0 0.3 0.8 0.6 0.4 0.2 0.2 2.5
Of which: real GDP growth -0.9 -1.0 -0.7 0.4 -1.4 -1.3 -1.3 -1.3 -1.3 -6.2
Exchange rate depreciation 7/ 0.0 0.0 0.0 … … … … … … …
Other identified debt-creating flows 0.4 0.9 1.0 2.2 1.4 1.4 1.3 1.3 1.1 8.7
Please specify (1) (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Policy lending and other adjustment terms 0.4 0.9 1.0 2.2 1.4 1.4 1.3 1.3 1.1 8.7
Residual, including asset changes 8/ 0.8 0.7 -0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0
8 35
7 Debt-Creating Flows projection
30
(in percent of GDP)
6
25
5
20
4
3 15
2 10
1
5
0
0
-1
-2 -5
-3 -10
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 cumulative
Primary deficit Real GDP growth Real interest rate Exchange rate depreciation
Other debt-creating flows Residual Change in gross public sector debt
Source: IMF staff.

1/ Public sector is defined as central government.
2/ Based on available data.
3/ Long-term bond spread over U.S. bonds.
4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.
5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate;
a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.
7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).
8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.
9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

REPUBLIC OF KOREA
Composition of Public Debt and Alternative Scenarios

Figure 2. Composition of Public Debt and Alternative Scenario
Composition of Public Debt
By Maturity By Currency
(in percent of GDP) (in percent of GDP)
70 70
Medium and long-term Local currency-denominated
60 Short-term 60 Foreign currency-denominated
50 50
40 40
30 30
projection
20 projection 20
10 10
0 0
2009 2011 2013 2015 2017 2019 2021 2023 2025 2009 2011 2013 2015 2017 2019 2021 2023 2025
Alternative Scenarios
Baseline Historical Constant Primary Balance
Gross Nominal Public Debt Public Gross Financing Needs

(in percent of GDP) (in percent of GDP)
70 9
60 8
7
50
6
40 5
30 4
3
20
2
10
projection 1
projection
0 0
2018 2019 2020 2021 2022 2023 2024 2025 2018 2019 2020 2021 2022 2023 2024 2025
Underlying Assumptions
(in percent)
Baseline Scenario 2020 2021 2022 2023 2024 2025 Historical Scenario 2020 2021 2022 2023 2024 2025
Real GDP growth -1.0 3.4 2.9 2.6 2.4 2.3 Real GDP growth -1.0 3.3 3.3 3.3 3.3 3.3
Inflation 1.1 0.0 0.7 1.2 1.6 1.6 Inflation 1.1 0.0 0.7 1.2 1.6 1.6
Primary Balance -4.0 -3.3 -3.5 -3.5 -3.2 -2.9 Primary Balance -4.0 -0.1 -0.1 -0.1 -0.1 -0.1
Effective interest rate 2.0 2.0 2.0 2.0 2.0 2.0 Effective interest rate 2.0 2.0 2.1 2.1 2.2 2.2
Constant Primary Balance Scenario
Real GDP growth -1.0 3.4 2.9 2.6 2.4 2.3
Inflation 1.1 0.0 0.7 1.2 1.6 1.6
Primary Balance -4.0 -4.0 -4.0 -4.0 -4.0 -4.0
Effective interest rate 2.0 2.0 2.0 2.0 2.0 2.0
Source: IMF staff.

REPUBLIC OF KOREA
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION
March 2, 2021 —INFORMATIONAL ANNEX
Prepared By Asia and Pacific Department
CONTENTS
FUND RELATIONS _____________________________________________________________________ 2
STATISTICAL ISSUES __________________________________________________________________ 4

REPUBLIC OF KOREA
FUND RELATIONS
(As of January 31, 2021)
Membership Status: Joined August 26, 1955; Article VIII
General Resources Account

SDR Million Percent Quota
Quota 8,582.70 100.00
Fund holdings of currency (exchange rate) 6,209.41 72.35
Reserve tranche position 2,373.29 27.65
Lending to the Fund
New arrangements to borrow 143.35
SDR Department
SDR Million Percent Allocation
Net cumulative allocation 2,404.45 100.00
Holdings 2,477.49 103.04
Outstanding Purchases and Loans

None
Financial Arrangements (In SDR Million)

Type Date of Arrangement Expiration Date Amount Approved Amount Drawn
Stand-by Dec. 04, 1997 Dec. 03, 2000 15,500.00 14,412.50
Of which SRF Dec. 18, 1997 Dec. 17, 1998 9,950.00 9,950.00
Stand-by Jul. 12, 1985 Mar. 10, 1987 280.00 160.00
Stand-by Jul. 08, 1983 Mar. 31, 1985 575.78 575.78
Projected Obligations to Fund1

(SDR Million; based on existing use of resources and present holdings of SDRs)
2021 2022 2023 2024 2025

Principal 0.0 0.0 0.0 0.0 0.0
Charges/interest 0.05 0.03 0.03 0.03 0.03
Total 0.05 0.03 0.03 0.03 0.03
1/ When a number has overdue financial obligations outstanding for more than three months, the amount of
arrears will be shown in this section.
Exchange Rate Arrangement:
Korea’s exchange rate system is classified as “free floating” de jure. It has been classified de facto as
“floating” since 2009. Over 1997–2008, the exchange rate was classified as “free floating”
(“independently floating” under the older classification system). Korea maintains exchange

REPUBLIC OF KOREA
restrictions for security reasons, in accordance with UN Security Council Resolutions, which have
been notified to the Fund under the procedures set forth in Executive Board Decision 144 (52/51).
Recent FSAP and ROSC Participation:
An FSAP was concluded in March 2020. The Financial System Stability Assessment report has been
published (Country Report No. 20/120) and is available on the web at:
https://www.imf.org/-/media/Files/Publications/CR/2020/English/1KOREA2020001.ashx
STA: Discussions on Korea’s data dissemination practices against the IMF’s Special Data
Dissemination Standard (SDDS) were held in Seoul during December 2009, and a Report on the
Observance of Standards and Codes (ROSC) was drafted and finalized in July 2010. The report has
been published and is available on the web through the link:
http://www.imf.org/external/pubs/ft/scr/2010/cr10229.pdf
Technical Assistance:
FAD: A technical assistance mission on government finance statistics took place in Seoul during the
period November 8–19, 2010.
MCM: Remote technical assistance on foreign exchange reserves management was conducted in
November 2020.

REPUBLIC OF KOREA
STATISTICAL ISSUES
As of February 12, 2021
I. Assessment of Data Adequacy for Surveillance
General: Data provision is adequate for surveillance.
National Accounts: The overall structure of the national accounts follows the recommendations of the
System of National Accounts 2008. Chain-linked (reference year 2015) and nominal GDP estimates are
compiled using the production and expenditure approaches; nominal GDP estimates are also compiled
using the income approach. The production approach provides the headline GDP and a statistical
discrepancy is identified on the expenditure side.
Consumer Price Index: The Consumer Price Index (CPI) covers 92.9 percent of total households of
Korea; it excludes farming and fishing households. The geographical coverage, which includes
38 urban areas, should be extended to rural areas. The consumption basket is updated every three
years; currently, expenditure weights are derived from the 2017 Household Income and Expenditure
Survey. The CPI index adopts both geometric means and the ratio of arithmetic means. The missing
prices of products, except for the seasonal items, are imputed by the price movements of similar
products of the same item in the same geographic area.
Producer Price Index: The Producer Price Index (PPI) covers all domestic industrial activities and a
large segment of service activity. It excludes exported products, however, because the Export Price
Indexes are compiled separately in Korea. The current PPI (2015 = 100) follows recommended
compilation processes from the 2004 PPI manual. The current weight reference period is 2018. The
index weights are updated each year based on the national accounts input-output tables with a three-
year lag. The simple geometric average and the weighted geometric average are employed in the
elementary level index compilation. The PPI classification by activity conforms to the KSIC, which is
itself based on the International Standard Industrial Classification (ISIC)––with slight modifications only
to reflect local considerations. PPIs by stage of processing are also disseminated.
Government Finance Statistics: Two sets of government finance statistics (GFS) are compiled for the
central government, one using national definitions and the other using internationally recognized
standards based on GFSM 2001. The Korean authorities report consolidated GFS data on the general
government for publication in the Government Finance Statistics Yearbook (GFSY) which include
general government operations and a full balance sheet, although functional expenditure data are not
provided. The general government data are compiled with lags (the latest available data are for 2019),
mainly due to the lack in timely source data for the local governments.
Financial Sector Data: Monetary and financial statistics (MFS) compiled by the Bank of Korea (BOK)
broadly follow the IMF’s Monetary and Financial Statistical Manual. The BOK reports monthly monetary
data for the central bank and other depository corporations using the standardized report forms
(SRFs). The BOK does not report data for other financial corporations.

REPUBLIC OF KOREA
Korea regularly reports quarterly Financial Soundness Indicators (FSIs) and metadata to the IMF for
dissemination on its website, with data currently available through 2020Q2. Going forward, the Korean
authorities should shift to more timely provision of FSI data to the Fund with a time lag in line with the
average in advanced G20 economies of no more than 4 months.
Korea also reports data on several key series and indicators of the Financial Access Survey (FAS),
including the two indicators (commercial bank branches per 100,000 adults and ATMs per 100,000
adults) adopted by the UN to monitor Target 8.10 of the Sustainable Development Goals (SDGs).
External Sector Statistics: The BOK currently compiles the balance of payments and international
investment position (IIP) statistics consistent with the Balance of Payment and International Investment
Position Manual, sixth Edition (BPM6) analytical framework (see http://ecos.bok.or.kr/). The BOK
adopted the BPM6 in March 2014.
Korea reports balance of payments and IIP data for the IFS (quarterly data) and the Balance of
Payments Statistics Yearbook (annual data) publications.
II. Data Standards and Quality
Korea subscribed to the Fund’s Special Data A Data ROSC reassessment was published in July
Dissemination Standard (SDDS) in September 2010.
1996.

REPUBLIC OF KOREA
Table 1. Korea—Table of Common Indicators Required for Surveillance

(As of February 12, 2021)
Date of Date Frequency Frequency Frequency Memo Items:
Latest Received of of of Data Quality – Data Quality –
Observation 7 Publication7 Methodologic Accuracy and
Data7 Reporting
al Soundness8 Reliability9
Exchange Rates 2/12/2021 2/12/2021 D D D
International Reserve Assets and

Reserve Liabilities of the
Monetary Authorities1 Jan. 2021 Feb. 2021 M M M
Reserve/Base Money Nov. 2020 Jan. 2021 M M M O, O, O, LO O, O, O, O, O

Broad Money Nov. 2020 Jan. 2021 M M M
Central Bank Balance Sheet Nov. 2020 Jan. 2021 M M M

Consolidated Balance Sheet of
the Banking System Nov. 2020 Jan. 2021 M M M
Interest Rates2 2/12/2021 2/12/2021 D D D
Consumer Price Index Jan. 2021 Feb. 2021 M M M O, O, O, O O, O, LO, O, O

Revenue, Expenditure, Balance
and Composition of Financing3 – O, O, N/A, O,
General Government4 2019 Jan. 2021 A A A O, O, O, O NA
Revenue, Expenditure, Balance
and Composition of Financing3–
Central Government Nov. 2020 Jan. 2021 M M M
Stocks of Central Government
and Central Government-
Guaranteed Debt5 Nov. 2020 Jan. 2021 M M M
External Current Account Balance Dec. 2020 Feb. 2021 M M M O, LO, LO, LO O, O, O, O, O
Exports and Imports of Goods

and Services Dec. 2020 Feb. 2021 M M M
O, O, LO, O,
GDP/GNP Q4 2020 Q1 2021 Q Q Q O, O, O, O LO
Gross External Debt Q3 2020 Q4 2020 Q Q Q

6
International Investment Position Q3 2020 Q4 2020 Q Q Q
1
Any reserve assets that are pledged or otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to
a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those
linked to a foreign currency but settled by other means.
2
Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
3
Foreign, domestic bank, and domestic nonbank financing.
4
The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local
governments.
5
Including currency and maturity composition.
6
Includes external gross financial assets and liability positions vis-à-vis nonresidents.
7
Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).
8
Reflects the assessment provided in the data ROSC or the Substantive Update (published in July 2010, and based on the findings of the mission that
took place during December 09–22, 2009) for the dataset corresponding to the variable in each row. The assessment indicates whether international
standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO);
largely not observed (LNO); not observed (NO); and not available (NA).
9
Same as footnote 8, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data,
and revision studies.

Statement by the IMF Staff Representative
March 17, 2021
This staff statement provides an update on developments and information that has become
available since the staff report was issued. The statement does not alter the thrust of the staff
appraisal.
1. The authorities have proposed a supplementary budget for KRW 15tr (0.8 percent
of GDP). The supplementary budget is targeted toward COVID relief and mitigation, by
providing relief and financing support for small business owners, employment retention and
creation measures, and funding for vaccination rollout. With the supplementary budget, the
fiscal impulse in 2021 is now estimated to turn positive (0.3 percent of GDP), consistent with
staff recommendations.
2. The authorities have extended measures aimed at maintaining accommodative

credit conditions. For qualifying SMEs and small merchants, financial institutions are
permitted to voluntarily extend the deferral period on loan principal and interest payments
until September. The temporary reduction in banking system maximum loan-to-deposit ratios
and minimum domestic and foreign currency liquidity coverage ratios have also been
extended. These measures reduce the risk of a premature tightening in lending conditions,
especially for SMEs.
3. There was a small upward revision to Q4-2020 real GDP. Real GDP growth was
1.2 percent (q/q) in Q4, from 1.1 percent. Annual growth in 2020 remained at -1.0 percent.
Along with the stimulus provided through the supplementary budget, staff now projects
growth of 3.6 percent in 2021.
4. Inflation in February was in line with staff projections. Headline inflation increased
to 1.1 percent year-on-year, from 0.6 percent in January, driven by rising food and fuel
prices. Core inflation remained modest, however, at 0.3 percent year-on-year
(Jan.: 0.4 percent). Staff forecasts headline inflation to reach 2 percent in the coming months
on higher commodity prices and base effects, before falling to just above one percent by the
end of the year.
Statement by Chang Huh, Executive Director for Republic of Korea,
Byung Hee Yoo, Senior Advisor to Executive Director, and
Jinhyuk Yoo, Advisor to Executive Director
March 17, 2021
On behalf of the Korean authorities, we would like to thank Mr. Andreas Bauer and his
team for the candid and constructive discussion and policy dialogue during the 2021
Article IV consultations under particularly challenging circumstances. The authorities
value staff’s continuous engagement and broadly agree with staff’s assessment on the
economic outlook and policy recommendations. Despite the contraction brought on by
the pandemic last year, the Korean economy has remained resilient through strong
economic fundamentals and appropriate policy responses.
COVID-19 Response and Vaccination
Since the onset of the COVID-19 pandemic, the Korean authorities have successfully
managed to contain the spread of the virus without resorting to strict lockdowns
despite several spikes in infection. A systematic response strategy consisting of
extensive testing, rigorous contact tracing, prompt isolation of the confirmed cases and
transparent disclosure of COVID-related information, has helped contain massive
infections. A nation-wide compliance of containment measures such as wearing masks,
utilization of ICT technologies and innovative measures such as drive-through testing
have also contributed to the successful containment1.
The authorities have secured enough COVID-19 vaccine to cover the entire
population2. In accordance with the national vaccination plan, vaccinations began in
February 26 with the aim of inoculating 70 percent of the population by November this
year. The initial priorities will be placed on medical staff and the elderly group.
The authorities pursued a two-track approach seeking a balance between

containment and economic recovery. They deployed multi-faceted policy responses
on fiscal, monetary, and financial fronts in a bold and timely manner. An
unprecedented policy support amounting to more than KRW 310 trillion (equivalent to
USD 280 billion or around 16 percent of GDP), including four supplementary budgets
(KRW 66.8 trillion) and financial support packages (more than KRW 175 trillion), could
help protect livelihoods and limit the economic fallout. The government made three
1
Korea’s comprehensive response to COVID-19 from the outbreak in January to the end of September in
2020 is well described in an e-book, “All about Korea’s response to COVID-19,” published in October 13,
2020.
2
The authorities have purchased 106 million doses of vaccines (for 56 million people) with four
pharmaceutical companies and are discussing the purchase of 20 million additional doses.
rounds of emergency relief payments — initially beginning with universal cash transfer
to the entire population (KRW 14.3 trillion) and subsequently to support more targeted to
those most affected (KRW 17.1 trillion). Financial support packages include support for
vulnerable groups such as small businesses and the self-employed through emergency
loans and reduction of social insurance premiums. The government placed a high priority
on maintaining jobs including through Employment Retention Subsidy
(KRW 2.7 trillion) which covers up to 90 percent of allowances for paid leave and
Emergency Employment Stability Subsidy (KRW 2.6 trillion) for freelancers and non-
regular workers. The authorities also formulated policy measures to restore consumption
and facilitate investment and export, including by distributing discount coupons
(equivalent to USD 1.8 billion) for culture and hospitality sectors, streamlining
investment tax incentives and creating online platforms for exporting SMEs.
Recent Developments and Outlook
In 2020, real GDP contracted by 1.0 percent for the first time since the Asian
Financial Crisis in 1998, but it was relatively less severe than contractions seen in
other advanced economies. Continued facility investment and strong government
spending, along with a rebound in exports in the second half of the year, partly offset a
significant contraction in private consumption brought on by COVID-19. Despite a
resurgence of COVID-19 cases, the Korean economy recorded positive real GDP growth
(Q-o-Q) in two consecutive quarters (3Q 2.1 percent, 4Q 1.2 percent) signaling a
strengthened foundation for a swift and strong economic recovery. Consumer Price Index
(CPI) inflation has been subdued at 0.5 percent in 2020, below the target of 2 percent, due
mainly to weakened inflationary pressure on the demand side, substantially lower global
oil prices and government’s welfare policies. Core inflation averaged 0.4 percent.
Employment decreased by about 218,000, mainly in contact-intensive service sectors and
temporary workers, and the unemployment rate was somewhat elevated to 4.0 percent, up
0.2pp compared to 2019.
The authorities take note of staff’s assessment that Korea’s external position in 2020
is broadly in line with fundamentals and desirable policy setting. The current account
surplus reached USD 75.3 billion in 2020, up by USD 15.6 billion from the previous
year. The unexpected increase is attributable to a rebound in exports in the second half of
the year led by strong global demand for high-tech products, substantial decline in global
oil prices and a sharp drop in demand for tourism and overseas study due to the
pandemic. While Korea will continue to see a current account surplus this year, once the
temporary factors related to the pandemic are resolved, the surplus is expected to shrink
somewhat.
The authorities projected the growth rate this year would reach 3.0-3.2 percent
reflecting the solid rebound in both exports and domestic demand. Exports and
facilities investment will have continued growth momentum of the fourth quarter in 2020
supported by economic rebounds in major trading partners, an upturn in the
semiconductor cycle and investment plans in new industry areas such as electric vehicles
and bio-health. Private consumption is expected to rebound moderately with a gradual
normalization of economic activities and improvement in income and employment in
addition to base effect. While the authorities agree there remains a significant output gap
currently, their view is that the Fund’s estimate of potential growth in the medium term is
somewhat large due to IMF’s overestimation of total factor productivity. The authorities
shared staff’s views on inflation which is projected to remain at a little over 1 percent in
2021. Some factors that weighed down inflation last year will in turn act as a factor in
adding inflationary pressure this year.
The authorities concur with staff that uncertainty surrounding the outlook remains
elevated reflecting COVID-related risks on both sides. Recurrent surges in infections
and delayed vaccinations at global and domestic levels would be the principal downside
risk to the economy while growth could be accelerated in case of a faster containment of
the pandemic. The pace of recovery in private consumption and investment can also play
in both directions. Other downside risks include disruptions in global value chains,
continued US-China trade tensions and a sudden reversal of risk sentiment in financial
markets.
Fiscal Policy
The authorities concur with staff’s view that fiscal policy should continue to play a
critical role in overcoming the pandemic crisis and support those affected in a
targeted manner. Last year, supplementary budgets were formulated four times for the
first time in 59 years and the fiscal execution rate was the highest ever recorded at
97.8 percent. Fiscal policy will remain expansionary in accordance with staff’s
recommendation. In 2021, the budgetary expenditure will be increased by 8.9 percent
compared to the 2020 original budget. The 2021 budget aims to maintain COVID-related
support and strengthen momentum for economic recovery as well as provide support for
national priorities such as digital transformation and a greener and more inclusive
economy. Furthermore, the government plans to frontload spending—committing
63 percent of the budget in the first half of the year—focusing on job creation and SOC
projects. In line with staff recommendation, the government submitted to the National
Assembly a proposal of supplementary budget amounting to KRW 15 trillion early this
month. This extra budget aims to provide further emergency relief subsidy to those most
affected by the prolonged pandemic including small merchants and vulnerable workers
such as freelancers and platform workers without employment insurance coverage,
support employment retention and job creation, and increase spending for COVID-19
vaccine rollout.
The authorities remain mindful of maintaining fiscal soundness in the medium to

long term amid rising fiscal spending related to the pandemic. The unprecedented
expansionary government spending has widened the budget deficit to 4.4 percent from
1.5 percent of GDP in the original budget plan in 2020. Although Korea’s government
debt to GDP remains low at around 40 percent as of 2020 compared with other OECD
countries, the authorities have been concerned about the pace of the accumulation of
government debt. In December last year, the government submitted to the National
Assembly a proposal of fiscal rule which ensures flexibility to manage the government’s
debt and fiscal deficit instead of targeting a specific level for either one. There will be a
transition period of three years before the national fiscal rules take effect in 2025. The
proposed fiscal rule includes a complementary provision that ensures countercyclicality
by easing the fiscal balance rule by 1 pp in case of a downturn in addition to an escape
clause in case of a crisis. The government views that the staff recommendation to
introduce an expenditure rule is not appropriate for Korea at this stage because structural
change on the revenue side is expected given increasing welfare expenditure. However,
an expenditure rule can later be considered as additional operative rule for fiscal
sustainability once the government-proposed fiscal rule is well in place and
operationalized. The specific conditions of the escape clause and relaxation provision for
fiscal balance rule will be discussed in the course of the legislation of the fiscal rule. Due
attention will be paid to the staff recommendation on the designation of an independent
institution such as a fiscal council.
Monetary Policy and Exchange Rate Policy
The Bank of Korea (BOK) pursued accommodative monetary policy through a wide
range of policy tools to minimize the negative impact on the economy from the
pandemic. In 2020, the BOK lowered its policy rate by 75 basis points to 0.5 percent,
temporarily offered unlimited repos, raised the ceiling on the Bank Intermediated
Lending Support to SMEs by KRW 18 trillion to KRW 43 trillion, and introduced
Corporate Bond-Backed Lending Facility as a safety net for banks and non-bank financial
institutions (NBFIs)3.
The authorities consider the current policy rate supportive and accommodative
3
BOK’s Corporate Bond-Backed Lending Facility expired on February 3, 2021 as Korea’s financial
markets have stabilized and liquidity conditions have been favorable.
considering the all-time low interest rate, high money and credit growth, and loose
financial conditions. The BOK is cautious against pre-emptively providing additional
monetary accommodation unless the economic conditions deteriorate significantly. The
BOK stressed that an additional policy rate cut could have a limited effect on the real
sector because the current downturn is mainly driven by containment measures and may
increase the risk of financial imbalances by sending the wrong signal to asset markets.
The BOK affirmed that it would consider various policy tools as necessary with careful
examination of the effectiveness of various instruments. However, a yield curve control
or negative interest rates are not considered viable options for now. While the authorities
concurred with the primary role of macroprudential measures for financial stability, they
called attention to the heightened risk of financial imbalances. Despite the continued
tightening of macroprudential policy measures, financial imbalances have been
accumulating in an environment of financial easing, with funds concentrated in asset
markets and with household debt increasing. In this regard, attention also needs to be paid
to financial stability, in terms of monetary policy operation.
The authorities have implemented FX policy tools in a flexible manner to cope with
external shocks triggered by the pandemic while maintaining a flexible foreign
exchange rate regime. The authorities reaffirmed that foreign exchange rate is
determined in the market and FX intervention is conducted only in exceptional market
conditions. Since December 2019, the authorities have shortened the cycle of publication
of net purchase of US dollars for the FX market stabilization from semi-annually to
quarterly to further enhance the transparency of the foreign exchange policy4. As global
financial market strain deteriorated FX funding conditions and triggered a severe bout of
turbulence in Korea’s FX markets in March 2020, the Korean authorities relaxed FX
macroprudential measures such as a levy of non-deposit foreign currency liabilities and a
leverage cap on FX derivatives to ease burden of financial institutions in funding FX
liquidity. In January this year, the authorities announced a policy initiative to tighten
monitoring on FX management of financial institutions. This initiative includes measures
to strengthen monitoring on FX liquidity of NBFIs, build FX liquidity backstop
mechanisms for NBFIs, and recalibrate FX macroprudential regulations.
Financial Sector Policy
Korea’s banking sector entered the pandemic in a strong position and remains
sound overall. The financial soundness indicators are stronger than the previous year and
the asset quality indicators are also very strong. The financial sector has played an
4
The publication of net purchase of US dollar for FX market stabilization started on a semi-annual basis in
March 2019.
important part in supporting SME borrowers by providing extension of maturity and
deferral of loan payments (more than KRW 130 trillion). Set to expire at the end of
March 2021, these measures were extended six more months to September 2021 after
gaining consensus among the authorities and financial institutions. An orderly exit plan
will be discussed before then.
The authorities launched a wide range of financial support facilities to provide

emergency credit for SMEs and small merchants and stabilize bond and stock
markets5. While most financial support packages introduced last year have been
functioning well so far, a few, such as Key Industry Stabilization Fund, have shown low
utilization. This is partly because these facilities are a back-up measure and the Korean
economy weathered the COVID-driven downturn relatively well. The authorities also
temporarily relaxed some of the regulations on financial institutions’ capital adequacy
and liquidity, and asset quality requirement to help boost their financing capacity, mostly
until end-June 2021. The authorities remain committed to maintaining these financial
facilities and extended temporary regulatory relaxation by six months as the virus is still
spreading and its detrimental effects prevalent. In December 2020, the authorities also
extended the SPV for corporate bond and commercial paper by six months to July 2021
and increased the portion of the SPV’s purchase for lower-credit bonds to 75 percent
from the previous 70 percent.
The authorities agree with staff that overall household debt risks are limited and
manageable with several mitigating factors. The authorities shared the concern on
increasing household loans, both unsecured loans and mortgages, on the back of asset
market rallies and the expectation of a continuing increase in asset prices. They have
already increased the frequency of scrutiny on bank risk management regarding
unsecured loans. The authorities are currently reviewing a new and stricter DSR rule
which is based on individual borrowers rather than financial institutions as well as on the
lifetime income rather than the current income. The authorities see merit in introducing
Sectoral Countercyclical Capital Buffer (SCCyB) and consider measures to require banks
to set aside additional capital in proportion to their household assets.
The authorities aim to stabilize housing markets by eradicating speculative demand

and protecting end users of houses and they are committed to develop various ways
to increase housing supply. Abundant liquidity and increased demand driven by
proliferation of households pushed housing prices up. The government recently
5
The financial support facilities include Emergency Lending Program for Small Merchants, Working
Capital Support Program, Stock Market Stabilization Fund, Bond Market Stabilization Fund, Key Industry
Stabilization Fund, and Special Purpose Vehicle to support Corporate Bond and CP Markets.
introduced measures including relaxing regulation on floor area ratio and extra incentives
for landowner-residents to facilitate housing development in major cities. The authorities
have a different view from staff on the effect of pre-construction sales procedures and
pre-sale price cap system that have helped stabilize the housing market and have not
prevented private developers from supplying houses as the price is sufficiently high to
cover the construction cost and margin.
Structural Policies
In July 2020, the Korean government announced a bold national transformation

strategy called “the Korean New Deal (KND),” bracing for the post-COVID era.
The KND rests on three pillars: Green New Deal, Digital New Deal and the
strengthening of safety nets. The Green New Deal initiative aims to gain a foothold for
Korea’s sustainable growth and carbon-neutral society. It consists of the green transition
of infrastructure and transportation, increased supply of low-carbon renewable energy
and innovation-friendly ecosystem for green industries. This initiative will set a solid
groundwork for Korea’s recent commitment to carbon neutrality by 2050. The Digital
New Deal aims for digital transformation of traditional industries by strengthening
systems for data, network and Artificial Intelligence. In connection with the KND, the
industrial policy direction is set to green and digital. The authorities pursue upgrading the
overall production process of traditional key industries such as shipbuilding and steel and
promoting new industries including future cars, bio-health and system semiconductors.
Structural changes from the Green and Digital New Deal would entail job mismatches
and the government is dedicated to strengthening social safety nets by providing job
training and expanding the coverage of employment insurance. The authorities anticipate
KRW 160 trillion of investment in the KND from central and local governments as well
as private sector until 2025, which will create 1.9 million jobs.
One of Korea’s key policies is promoting innovation to boost productivity. The

authorities have implemented a regulatory sandbox that is pre-permissive and post-
regulatory. For the past two years, 410 cases have been approved through the regulatory
sandbox process, contributing to more than KRW 1.4 trillion of investment and around
2,800 of jobs created. The authorities have strived to lift regulations that restrict
economic activities. They launched multi-ministerial Task Forces and relaxed regulatory
measures related to start-ups. Government support for business foundation has been
extended to the service sector. Regulation Free Zones were created in 2019 to promote
innovation and balanced development of local regions.
Korea continues to promote labor market stability and flexibility through social
dialogue and compromise. The authorities are committed to strengthen the social safety
net through measures such as unemployment benefits and further improving active labor
market policies—including public employment services and vocational training. They
have already extended the coverage of Employment Insurance to artists in 2020 and plan
to extend it to non-regular dependent workers in 2021. They are also currently working
on the roadmap to extend the mandatory membership to the self-employed. The
authorities also expanded the eligibility of National Basic Livelihood Security by
abolishing family-support obligation criteria.
In 2020, the Korean authorities announced their vision of carbon neutrality by 2050
and laid out the policy framework to achieve this ambitious vision. To this end, they
will accelerate the transition towards a low-carbon economy in all areas from energy and
transportation to industry and city-planning and promote new promising low-carbon
industries. The authorities plan to rebuild the institutional foundation, such as taxes, levy,
R&D subsidies and emission trading system, in the direction of strengthening carbon
pricing and supporting a low-carbon transition, introduce a dedicated fund, and increase
green financing. The emission trading system (ETS) will be recalibrated in accordance
with an upgraded target of carbon emission to be determined through a comprehensive
consultation with stakeholders to achieve the carbon neutrality vision. However, the
authorities have a view that carbon price floor is premature in Korea as it may hinder
market determination of carbon price and reduce companies’ participation in the ETS. In
addition, the government will not neglect to take care of those left behind in the transition
process.
The corporate resolution system is well-organized in Korea and the authorities

affirmed that the system would work well in the aftermath of the pandemic. Korean
companies have emerged from several crises with greatly improved corporate balance
sheets and reduced reliance on short-term financing, and therefore, large-scale corporate
bankruptcies are not expected. There has been little change in the overall trend of
corporate restructuring cases and the courts have sufficient capacity to cope with a
potential increase of cases. Furthermore, the corporate resolution system is under review
to enhance the effectiveness and efficiency.

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IMF Country Report No.

• An Informational Annex prepared by the IMF staff.

• A Staff Statement updating information on recent developments.

• A Statement by the Executive Director for the Republic of Korea.

The documents listed below have been or will be separately released.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

International Monetary Fund

IMF Executive Board Concludes 2021 Article IV Consultation

Activity has been recovering since Q2-2020, supported by a rebound in exports—especially of

Executive Directors commended Korea’s effective COVID-19 containment measures and

Directors viewed the financial system as resilient overall, supported by a macroprudential

STAFF APPRAISAL _____________________________________________________________________________ 29

2 INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND 3

Box 1. Korea’s Health and Economic Response to the COVID-19 Outbreak1

4 INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND 5

Figure 1. Activity, Employment, and Inflation

6 INTERNATIONAL MONETARY FUND

Figure 2. Policy Response to the COVID-19 Pandemic

Sources: National sources; Haver Analytics; and IMF staff calculations.

INTERNATIONAL MONETARY FUND 7

5. The recovery in economic activity has

8 INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND 9

Figure 3. Financial Conditions Indicators

80 Marginal funding cost (91 day CPs and 395

10 INTERNATIONAL MONETARY FUND

Figure 4. Leverage Cycle Dynamics

INTERNATIONAL MONETARY FUND 11

Figure 5. Corporate Balance Sheet Performance and Risk Indicators

12 INTERNATIONAL MONETARY FUND

OUTLOOK AND RISKS

13. The recovery would leave substantial

INTERNATIONAL MONETARY FUND 13

Figure 6. External Sector Developments

14 INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND 15

18. The 2021 budget implies some fiscal

16 INTERNATIONAL MONETARY FUND

Main Labor Market Safety Net Measures in 2020

Partial wage The government eased application

During the COVID shock: extend the

21. Gradual consolidation can be undertaken subsequently. Compared to the pre-COVID

INTERNATIONAL MONETARY FUND 17

Box 2. The Korean New Deal1

Overview of Korean New Deal

18 INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND 19

B. Monetary Policy and the FX Market

26. The policy rate has been brought to

20 INTERNATIONAL MONETARY FUND

28. Additional near-term accommodation

INTERNATIONAL MONETARY FUND 21

the FX policy framework by launching an interagency FX macroprudential council. 10 The authorities

22 INTERNATIONAL MONETARY FUND

C. Financial Sector Policy

INTERNATIONAL MONETARY FUND 23

Real Apartment Price Growth: The Effect of Tighter Macroprudential Measures