IMF Forecasts South Korea’s Economy Will Contract 4% in 2009

By Seyoon Kim

Feb. 3 (Bloomberg) -- The International Monetary Fund expects South Korea’s economy will contract this year for the first time since the Asian financial crisis a decade ago, according to a statement from the nation’s finance ministry.

The economy will shrink 4 percent in 2009, the IMF forecast, compared with its November prediction of a 2 percent expansion, according to the statement distributed by the ministry in Gwacheon. The IMF expects a recovery in 2010 with growth of 4.2 percent, the statement showed.

Declining exports and weakening consumer spending prompted the Washington-based fund to reduce its forecasts for Asia’s fourth-largest economy, the ministry said. Overseas shipments tumbled by a record 32.8 percent last month and industrial production fell an unprecedented 18.6 percent in December as exporters Hyundai Motor Co., Hynix Semiconductor Inc. and LG Display Co. reduced output to cope with faltering demand.

“The IMF expects the South Korean economy to hit the bottom in the second quarter and start to pick up in the third quarter,” Vice Finance Minister Hur Kyung Wook told reporters yesterday in comments that were embargoed until today. “We have sufficient room both on the fiscal and financial side to increase spending and cut rates if needed.”

South Korea has allocated about 140 trillion won ($102 billion), or 15 percent of gross domestic product, in liquidity injections, tax cuts and stimulus spending. The central bank cut its interest rate to a record low of 2.5 percent in January.

“The main reason for the IMF revision is the export drop and weakening domestic demand following the global slump,” the ministry said. “The IMF said they are fundamentally optimistic about South Korea’s medium- and longer-term outlook.”

The IMF expects the economy will shrink 0.8 percent this quarter from the previous three months and stagnate in the second quarter, Hur said. The fund forecasts growth of 0.7 percent and 1.1 percent in the third and fourth quarters of 2009 respectively, he added.

South Korea’s gross domestic product declined 5.6 percent in the fourth quarter of last year from the previous quarter as exports, consumer spending and business investment dropped.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net