The International Monetary Fund (IMF) has indicated that South Korea is the only advanced economy among major nations expanding its fiscal policy capacity. This assessment comes as demand related to artificial intelligence (AI) improves growth prospects and enhances revenue conditions, allowing for increased investment to boost growth potential.
Regarding next year's budget, a neutral perspective has been noted, considering the growth rate of fiscal spending and the utilization of surplus tax revenue.
Choi Ji-young, IMF Executive Director, spoke with reporters in Bangkok, Thailand, on October 15, stating, "Among advanced countries, South Korea is the only nation with increasing fiscal capacity. There seems to be a common understanding among IMF staff that investments must be made to enhance growth potential."
Choi noted that South Korea was frequently mentioned during discussions of the World Economic Outlook (WEO) and the Asia-Pacific Regional Economic Outlook (REO) at a recent IMF board meeting. Amid rising global economic uncertainties due to conflicts in the Middle East, the Russia-Ukraine war, and trade tensions between nations, South Korea has benefited from increased demand related to AI, leading to improved growth forecasts.
He explained that South Korea's notable growth trend has attracted attention both within and outside the board, stating, "South Korea is isolated in discussions at the IMF; the situation is very different from other advanced countries," referring to this as a 'positive isolation.'
Earlier, the IMF projected South Korea's economic growth rate for this year at 3.3%, an increase of 0.7 percentage points from its April forecast. The growth rate for next year was also raised to 2.8%, up 0.3 percentage points.
The global economic growth rate is projected at 3.1% for this year and 3.4% for next year, indicating that South Korea is expected to outpace global growth rates. Choi conveyed that while AI-related investments support the global economy, the benefits are concentrated in certain countries and industries.
The improvement in fiscal capacity reflects the IMF's perspective on South Korea. According to the IMF's Fiscal Monitor released on October 14, the ratio of general government debt to GDP in South Korea is projected to be 47.3% this year, down 7.1 percentage points from the April forecast of 54.4%. The projection for 2031 was also revised down from 63.1% to 49.7%. This change is attributed to improved growth forecasts and changes in revenue conditions.
Choi emphasized the need to distinguish between the IMF's general policy recommendations and South Korea's situation. The IMF advises countries to carefully manage monetary and fiscal policies and maintain fiscal buffers in response to inflationary pressures from rising tariffs and energy prices, as well as potential future shocks. However, he noted that South Korea, with relatively sufficient fiscal capacity, has room to continue investing to enhance growth potential.
He stated, "Most countries lack fiscal capacity or are seeing it decline, but South Korea's fiscal capacity is increasing. The IMF staff recognizes South Korea's unique situation."
Choi described the overall fiscal stance of next year's budget as being viewed neutrally. The government is managing the growth rate of spending at 12.8% despite increased revenue, utilizing some funds for debt repayment while leaving a significant portion for future investments through the Future Response Fund.
He remarked, "The Future Response Fund will have expenditures next year, but about 60% will be saved for later, which is positive in itself." There is a consensus on utilizing the unexpectedly large increase in tax revenue for investments that enhance growth potential rather than spending it all immediately or solely on debt repayment.
However, he added that the IMF has not yet issued an official evaluation of the specific projects included in the budget submitted to the National Assembly.
On the AI and semiconductor boom, Choi assessed that both opportunities and risks must be considered. The IMF views the uncertainty surrounding how much AI will boost productivity and the potential negative impacts on labor markets and financial stability as significant concerns. There is also caution regarding the possibility that increased investments could lead to financial market risks. The IMF recently identified the reassessment of AI investment expectations as a downside risk to the global economy in the WEO.
Nonetheless, Choi conveyed that the internal sentiment does not foresee an immediate downturn in AI investments and the semiconductor supercycle. He explained that investments in AI infrastructure, such as data center construction, are long-term projects, making rapid shifts in investment flows unlikely. Choi stated, "It seems that the internal view is that AI-related investments will last quite a while," emphasizing the need to look at long-term trends rather than reacting excessively to short-term volatility.
He noted that if the AI boom were to decline, South Korea could experience impacts such as adjustments in asset prices like stocks, declines in corporate profitability, and slowdowns in the current account and growth. However, he clarified that pointing out these risks is different from suggesting that the investment cycle will end immediately. This reflects the IMF's positive outlook on South Korea's growth while also considering the sustainability and risk factors of the AI industry.
Choi, who previously served as the Deputy Minister for International Economic Affairs at the Ministry of Economy and Finance, officially began his term as IMF Executive Director in April. South Korea alternates between holding the positions of Executive Director and Alternate Executive Director at the IMF and the World Bank. Choi is a seasoned international economic official, having held various roles including Director of the Foreign Exchange System Division, Director of the International Finance Division, and Director of the International Finance Bureau, overseeing international finance and external economic affairs until his recent appointment.
* This article has been translated by AI.
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