[NEWS ANALYSIS]`4% contraction forecast too pessimistic`

The International Monetary Fund`s 4 percent contraction forecast for Korea is too pessimistic, experts say, although many economists expect that economic expansion will be almost impossible this year.

"The IMF`s prediction is much worse than I had expected. I didn`t think the estimate would go as low as to minus 4," said Joo Won, an economist at the Hyundai Economic Research Institute.

"Given that many agree the economy will recover from the second half, contraction in the first half might be worse than minus 4 percent growth," he said.

Joo`s opinion was widely shared with other economists.

Some said the IMF forecast did not fully reflect the government`s efforts to expand fiscal spending and implement stimulus packages.

The government has poured out plans to spend more than 140 trillion won ($102 billion), or 15 percent of GDP, in liquidity injections, tax cuts and stimulus programs such as "Green New Deal" projects. The central bank slashed the interest rate to a record low of 2.5 percent in January.

Despite such efforts, the IMF sharply lowered the growth forecast because of the nation`s exposure to the global economy.

"The Korean economy is one of the most globally integrated in the world, and while this integration has been a key factor behind Korea`s remarkable economic history, there is little doubt that the country is now particularly affected by the global crisis," said Anoop Singh, director of the IMF`s Asia and Pacific Department, in a statement.

Citibank Korea economist Oh Suk-tae said that the IMF probably gave its worst forecast among G-20 nations to Korea because of two risky factors. These are shared with Asia and the United States -- heavy reliance on exports and large household debt.

"It`s not too much to say that Korea is the only country that has both those two problems," Oh said.

Government officials emphasized that the IMF projected a 4.2 percent growth in 2010, which would be the world`s fastest economic recovery. The world`s GDP growth would hover around 3 percent in 2010, the IMF predicted.

However, experts point out that a 4.2 percent growth in 2010 is not a rosy picture at all, citing the base effect from 2009.

"If the economy contracts 4 percent this year and grows 4.2 percent next year, it`s only a comeback to normality. It`s not a strong recovery," said Kwon Soon-woo, economist with the Samsung Economic Research Institute.

Industry watchers urged the government to execute fiscal spending quickly to avert a severe decline.

HERI`s Joo said spending 15 percent of GDP as a fiscal stimulus package is never small-scale, but the government would have to seek an extra budget if the economic downturn gets worse.

Others called for another rate cut from the central bank, saying inflationary pressures have abated.

"The BOK has already cut the benchmark interest rate to 2.5 percent -- a record low -- but further monetary easing is needed," said Sherman Chan, economist with Mooday`s Economy.com.

"The central bank is expected to announce another rate cut next week, of probably 100 basis points but potentially even larger."

By Kim Yoon-mi



(yoonmi@heraldm.com)