S. Korea only advanced economy expanding fiscal space, AI boom far from over, IMF director says

Korean economy seen in 'positive isolation' amid global headwinds

IMF views next year's budget as neutral, not expansionary

Growth outlook has room to improve once policy effects are factored in

Data center construction boom points to sustained AI investment

Choi Ji-young, South Korea's executive director at the International Monetary Fund, said South Korea stands alone among advanced economies in expanding its fiscal space, adding that IMF staff broadly agree the country must continue investing to sustain its growth potential.

Choi made the remarks at a press briefing in Bangkok on Thursday (local time), on the sidelines of the IMF–World Bank Annual Meetings.

IMF Executive Director Choi Ji-young speaks at a press briefing in Bangkok, Thailand, on Thursday (local time), on the sidelines of the IMF–World Bank Annual Meetings. [Ministry of Economy and Finance]

Choi said that while the global economy faces downward pressure from the Middle East conflict, the Russia-Ukraine war and trade tensions between nations, South Korea's growth outlook is improving thanks to the AI industry boom, even as its fiscal space continues to expand. He described South Korea's differentiated economic position as "positive isolation."

He said the IMF's internal view of the South Korean economy has also shifted. Unlike past board discussions, which tended to focus on problems, the latest World Economic Outlook and Asia-Pacific Regional Economic Outlook discussions drew consistently positive reactions. "Staff keep saying 'South Korea in particular' whenever they give their briefings," Choi said. "There is a real sense of envy toward South Korea among IMF staff and board members."

The IMF has been advising countries to tighten fiscal policy in response to inflationary pressures from tariff disputes and rising oil prices, as well as external uncertainty. But South Korea's expanding fiscal space makes it difficult to apply the same policy prescription as other advanced economies, Choi said.

"The IMF's basic policy advice framework simply does not fit South Korea," he said, adding that he has repeatedly raised the issue with the IMF managing director and the Asia-Pacific department head, and that the Asia-Pacific department is well aware of South Korea's unique circumstances.

On the government's budget proposal for next year, Choi said the IMF internally views it as a neutral fiscal stance, not an expansionary one.

"We see next year's budget as neutral," he said. "Tax revenues are rising significantly, but spending growth is 12.8 percent, and a portion goes toward repaying government bonds while a substantial share is set aside in a future-response fund." With government revenues rising more than 30 percent from the previous year, the relatively limited increase in spending makes it hard to characterize the budget as expansionary, he noted.

Choi said that at a recent Regional Economic Outlook briefing, a question was raised about whether South Korea's expansionary fiscal policy and tight monetary policy were out of sync, but IMF Asia-Pacific Department Director Krishna Srinivasan said the fund does not view South Korea's fiscal policy as expansionary.

He noted, however, that this assessment reflects the IMF's internal view, and that a formal evaluation of next year's budget will take place during the annual consultation with South Korea, set to begin in November.

Choi also said channeling all additional tax revenues into paying down national debt is not necessarily sound fiscal management. "If a company suddenly sees its profits surge, it may not be sound financial management to pay off all its debt and bring leverage to zero," he said. "The company should be investing to grow further and expand its market share."

On the future-response fund, he said the specific project details would need to be examined, but added that "the structure itself — spending some next year while setting aside about 60 percent for later — is positive."

On concerns about fiscal health raised after the IMF projected South Korea's national debt ratio would reach 63.1 percent of GDP by 2030 — a forecast released in April — Choi said the IMF's debt projections have continued to change and that "the most important thing is growth."

"For a country like ours, where the national debt hovers around 50 percent of GDP, the debt outlook can vary enormously depending on how well the economy grows," he said. "Rather than fixating on the debt ratio itself or its projections, what matters more is how much we invest in innovative sectors and how much we grow going forward."

He also said there is room for the IMF's growth outlook to improve if the effects of policy-driven investment are eventually factored in.

"The portion of growth driven by policy factors does not appear to be reflected in the growth outlook data the IMF has published," Choi said. "In that sense, it could be seen as somewhat conservative — but if that gets factored in, I think things will move in a better direction."

On the AI and semiconductor boom underpinning South Korea's growth, Choi said the IMF publicly emphasizes risk factors but internally expects the investment expansion to continue.

"There is a strong view that the AI boom will not suddenly reverse next year or the year after," he said. "Companies are racing to build data centers, and construction alone can take up to 10 years." He said current AI investment is unlikely to become meaningless in the short term.

He did, however, flag financial market risks from the surge in AI-related investment. With the share of AI-related financing rising from 3 percent to 19 percent in recent years, a reversal of the boom could hit asset prices — including shares — and the profitability of individual companies. He noted South Korea's current account could also be affected.

"The IMF's role is to flag risk factors," Choi said, "but there is no need to overreact by worrying too much about this."

He spoke positively of the government's response to the economic shock from the Middle East conflict, including measures such as an oil price cap. "The government appears to have responded appropriately," he said, describing the measures as playing a "smoothing" role that spread the economic pain felt by households and businesses.

Asked about the IMF's critical stance on fuel subsidies, Choi said the fund's basic position is that government support should be temporary and targeted at those who truly need it — such as vulnerable groups — given that most countries are seeing their fiscal space shrink. "It is hard to view that negatively, and I think it is seen as unavoidable," he said. "Given the fiscal situations of individual countries, it should be kept temporary."

y2k@heraldcorp.com