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ESCAP’s Economic and Social Survey of Asia and the Pacific 2010 – Briefing notes: Republic of Korea
Inflation, monetary policy and exchange rate developments
Low inflation has enabled policy makers to reinforce their expansionary fiscal
policies with lower and more accommodative monetary policy through low interest
rates. From October 2008, the Bank of Korea cut its policy rate six times in a row,
reducing it by 325 basis points to a record low of 2%.
While the recovery of the global economy is likely to put upward pressure on the
price of commodities including oil, inflation in the Republic of Korea is forecast to
remain at 2.8% in 2010.
The Republic of Korea also had net capital inflows- attributable mainly to the massive
inflows of portfolio investment which more than offset the net outflows related to
direct investment, derivatives and other investments. In 2009, the country had net
portfolio inflows of $51 billion, while there were outflows of $24 billion in 2008. This
together with the current account surplus, saw foreign reserve assets rise by over $65
billion in 2009.
As a consequence of the surplus in the current account, inflows of portfolio capital
and better access to foreign credit markets, the Korean won regained value, rising by
18% during 2009.
Fiscal situation and perspectives
The government’s massive fiscal stimulus package expected to continue throughout
2010, has helped the economy mitigate the impact of the global financial crisis. The
establishment of bank recapitalization fund and toxic asset fund cushioned the
banking sector during the severe credit crunch and helped stabilize the financial
markets. The job creation measures have helped labour market conditions from
deteriorating further in 2009.
However, increased government spending together with declines in tax revenue, will
put further pressure on government finances in 2010 which have already been
significantly weakened during the financial crisis. The fiscal balance went from a
surplus of 1.2% of GDP in 2008 to a deficit of 4.0% in 2009.
Published by the UN Economic and Social Commission for Asia and the Pacific – May 2010
Not an official document