South Korea’s high borrowing costs are holding back the country’s domestic demand, the director of the Asia-Pacific at the International Monetary Fund (IMF) said Thursday, although its exports are set to rebound on China’s recovery.

“The effects of the past monetary policy tightening and the normalization of fiscal policy following significant stimulus last year are affecting domestic demand,” Krishna Srinivasan, who heads the IMF’s Asia and Pacific Department, said in a news conference on the sidelines of the 56th Annual Meeting of the Board of Governors of the Asian Development Bank in Incheon, 27 kilometers west of Seoul.

The director noted high interest rates have led to a “correction” of housing prices and it is also “a factor holding back domestic demand.”

The Bank of Korea held its key rate steady at 3.5 percent last month after a rate freeze in February, as inflation appears to be easing and concerns are rising over an economic slowdown.

The South Korean central bank is scheduled to hold its monetary policy meeting later this month.

Srinivasan said growth has slowed in recent quarters in South Korea, as subdued growth of trading partners and the global semiconductor downcycle have been impacting exports.

South Korea’s chip exports came to US$6.38 billion in April, down 40 percent from a year earlier. The country’s chip exports have logged an on-year decline since August last year.

Still, there is a “silver lining” for the South Korean economy, as its exports are expected to gradually recover down the road, Srinivasan said.

“China’s rapid recovery, following its reopening from COVID-related restrictions, and a broadening from the initial expansion centered on domestic services should also increasingly bear positively on Korea’s exports,” he said.

Srinivasan said South Korea is expected to enjoy the impact of China’s reopening in the second half of 2023.

“The initial stage of the recovery in China has been led by consumption and services. In the second half of the year, you will see a change from consumption and services to more manufacturing, important for other companies, including from Korea,” he said. “Korea will see the impact of China’s sharp recovery.”

“And industry experts expect an improvement in the semiconductor cycle later in the year, which will have clear benefits for Korea’s exports,” the director added.

Srinivasan also said while the debt situation of Asia’s No. 4 economy is “pretty good,” the country needs to build “fiscal buffers” to cope with long-term challenges, including the aging population.

He was referring to the country’s efforts to adopt a fiscal rule that caps its deficit to 3 percent of the country’s gross domestic product.

“If that comes to fruition, I think it improves the fundamentals of Korea even more. It makes the fiscal stance credible,” he said.

Last month, the IMF trimmed its 2023 economic growth outlook for South Korea to 1.5 percent amid uncertainties in the global financial market. It marked a 0.2 percentage-point drop from the Washington-based organization’s estimate in January.

Source: Yonhap News Agency