The International Monetary Fund said Friday that it has decided to maintain its previous 2014 growth outlook for South Korea at 3.7 percent but expressed concerns over the relatively weak domestic demand caused by "debt overhang" in the household and corporate sectors.
The decision was made by an IMF team led by Isabelle Mateos y Lago, the deputy chief of the IMF's Asia-Pacific bureau. It completed its two-week-long annual meeting here with South Korean policymakers to assess its overall economic conditions.
The move came after the IMF cut its 2014 growth outlook for South Korea to 3.7 percent from 3.9 earlier last month. It also forecast the Korean economy to grow 2.8 percent this year, which is unchanged from an outlook unveiled in April.
"Growth is expected to strengthen further to 3.7 percent in 2014," the team said in a press release. "However, in the near term, absent reforms, private domestic demand momentum is expected to remain relatively weak, reflecting the debt overhang in parts of the household and corporate sectors."
The IMF team said that the Korean economy has tided over the recent financial turmoil well, saying that its "strong" fundamentals and "skilled" policymaking make its economy more likely to "benefit from the global recovery."
"However, it will need to rebalance its economic structure to continue lifting the living standards of its population, in an inclusive way, ever closer to that of the richest advanced economies," it noted.
The IMF team also gave high credit for the government's efforts to maintain the stability in the financial sector.
"The financial sector is sound overall. Banks' vulnerability to external liquidity shocks has declined, as macro-prudential regulations have reduced markedly banks' short-term external debt," the team said.
"Korea has emerged as a safe haven of sorts in the summer's market turmoil. Low inflation, a strong fiscal position and ample foreign currency reserves have strengthened Korea's attractiveness to risk-averse investors," it added.
The IMF team emphasized that the government should not withdraw its policy support "too soon." In particular, it noted that fiscal policy has an "essential" role to play.