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OECD's Outlook For South Korea Remains Unchanged
The group maintained its outlook on South Korea's economic growth at 5.8% in 2003, unchanged from its forecast in November.


24 Feb 2003

SEOUL (Dow Jones) -- In an economic survey, the Organization for Economic Cooperation and Development pointed out that it has maintained its outlook on South Korea. It forecast an economic growth of 5.8% in 2003, unchanged from its previous estimate in November. The forecast for 2004 was also maintained at 5.7%.

"The strength of domestic demand has led the economic recovery in Korea. However, the leading sectors - private consumption and construction investment - are likely to be less buoyant in 2003 and beyond," said the OECD.

Furthermore, the decline in share prices over the last several months will have a negative wealth effect and weaken consumer sentiment, it added.

As a result, South Korea's private consumption growth is expected to slow to 4.5% in 2003 and then to 4.2% in 2004, compared with 7.3% in 2002.

Economy Will Depend On Rebound In Exports

With domestic demand moderating, sustaining the country's expansion through 2004 at its current pace is likely to depend on a rebound in exports, according to OECD, which noted that South Korea's exports are likely to benefit from a growth in export markets.

As a result, South Korea's current account surplus is likely to total $5.4 billion in 2003 and $7.4 billion in 2004, up from $5 billion in 2002.

Inflation is projected to pick up from an estimated 2.7% in 2002 to 3.5% in 2003 due to rising labor costs, despite the expected moderation of domestic demand. In 2004, consumer prices are seen to rise 3.3%.

The country's jobless rate, meanwhile, will hover at 2.8% in 2003 and 2.7% in 2004 versus 2.9% in 2002, the OECD said.

The OECD stressed that the challenge for South Korea will be to maintain its high growth potential by overcoming remaining structural weaknesses through further reforms, while keeping inflationary pressures under control and containing potential financial imbalances through appropriate macroeconomic policies.

In the future, the central bank may need to gradually retreat from its monetary easing stance in a bid to contain inflationary pressures over the next two years, it said.

Continued Privatization Of Banking Sector Needed

At the same time, the OECD criticized the Bank of Korea for the manner in which it formulates its policies as well as for its lack of independence from the government.

"One weakness in the current framework is the focus on annual targets that are set in consultation with the government as mandated by law. Given the long time lags in the impact of monetary policy, the emphasis on the annual target is inappropriate," it said.

It also pointed out that the chance of success of inflation targeting is increased by the independence of the central bank.

On the fiscal budget, the organization believes the South Korean government's emphasis on consolidation is appropriate.

With the costs of financial sector restructuring remaining large during 2004 to 2006, the budget (excluding social security) is likely to remain in deficit, it said.

Among its other recommendations, it called on the government to enhance transparency and strengthen accountability in the bureaucracy.

The organization also called for continued privatization of the banking sector to "remove any doubts about government intervention in the management in the banks, which would pose more obstacles to the restructuring of the corporate sector."

In the corporate sector, the OECD pointed out that class action suits should be introduced to protect shareholders from fraudulent practices. "Ensuring that corporate governance is effective in practice will help strengthen the restructuring process and enhance the prospects for growth," it said.

It concluded its survey by emphasizing South Korea shouldn't become complacent about tackling corporate and financial restructuring.