South Korea is well positioned to fight off any economic shock because it maintains “strong economic fundamentals and ample buffers,” a senior official at the International Monetary Fund said Tuesday, amid growing recession worries prompted by surging borrowing costs seen globally to corral inflation.
Krishna Srinivasan, director of the Washington-based lender’s Asia and Pacific department, said that the country’s current account surplus and net foreign assets -- which account for around 40 percent of gross domestic product -- make up the key underlying support. Robust foreign exchange reserves, nearly three times larger than the short-term debt, are the hedge against a potential currency crisis, he added.
“You have strong macro metrics. You have strong policy decision frameworks,” Srinivasan told reporters after meeting with Finance Minister Choo Kyung-ho in Seoul. Srinivasan backed the Bank of Korea’s aggressive campaign to tame soaring consumer prices, saying prioritizing inflation control over shoring up growth was necessary.
Recently, the central bank has delivered interest rate hikes -- unmatched in size in recent history -- and vowed to focus on curbing higher prices until demand cools meaningfully. The bank expects annual price increases for this year to reach 5.2 percent, way past the bank’s 2 percent target. The policy rate, currently at a 10-year high of 3 percent, is expected to climb to 3.5 percent by year-end on the most hawkish bets.
Srinivasan stressed that a failure to tackle inflation head-on will lead to inflation expectations “getting unanchored” -- a scenario policymakers across the globe seek to avoid because lowering prices would prove to be harder once expectations are set against any anti-inflation measures.
Meanwhile, the latest BOK data showed that the inflation expectations edged up in October from a month earlier, despite the aggressive monetary tightening in place. Households expected consumer prices to rise 4.3 percent on average over the next 12 months, up 0.1 percentage point seen in September -- a surge in three months.
Higher bills for utilities and a “minor slowdown” in oil prices were behind pessimism, according to the bank.