Economic growth in the second half of 2006 is likely to fall to the 3% level bringing annual growth to 4.6%. Reflecting the negative impact expected from high oil prices and the unfavorable won-dollar exchange rate, the current annual growth forecast is 0.3% point lower than the 4.9% projected in March.

Affected by a decrease in exports and an increase in imports due to sharply stronger Korean won, the current account surplus is expected to be USD70 million, significantly lower than the previously projected level of USD2.78 billion. Meanwhile, the CPI inflation is likely to remain at the 3.0% as predicted earlier offsetting price push pressure from the oil price hike with the effect of won's appreciation.

Cited as major risk factors in the projection are additional hikes of international oil price and further currency appreciation following an imbalance in the global economy. Assuming the risk factors materialize (Dubai oil prices up to USD75/barrel during the next 3 quarters, won-dollar exchange rates further down at 920 in the third quarter and at 900 in the fourth quarter), annual growth rate may decline to 4.3% while the current account balance may record a deficit of USD5.9 billion.

Necessary to the stabilization of the foreign exchange rate are: first, creation of demand for the U.S. dollar through stimulation of corporate investment and overseas investment by the household sector and second, comprehensive measures to revamp the foreign exchange market such as diversification of export payment settlement currencies and relaxation of overseas investment-related restrictions. Lessons can be obtained from the Japanese experience in which Japan has achieved foreign exchange rate stabilization through efficient management of its international balance of payments and invigoration of overseas investment.

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