IMF: "Fiscal Expansion Warning, use of AI" Korean media: "Widening fiscal deficit, adoption of AI"

IMF: "Fiscal Expansion Warning, use of AI" Korean media: "Widening fiscal deficit, adoption of AI"

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While the IMF's report on the Korean economy explicitly stated "Fiscal Expansion Warning, use of AI," the Korean media completely fabricated the claim, claiming "Further expansion of the fiscal deficit, adoption of AI."

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The IMF publicly reported a "risk warning" regarding Korea, stating, "Uncertainty about the outlook remains high, and downside risks stem from long-term trade policy uncertainty, heightened geopolitical tensions, easing of financial tightening due to increased financial market volatility, increased volatility in global raw material prices, and a slowdown in the domestic semiconductor sector." However, Korean media outlets distorted this warning into, "The IMF recommends that the Lee Jae-myung administration increase the fiscal deficit and push for expanded AI adoption, as economic recovery is likely to be sluggish due to increased deficit spending."

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In fact, the IMF's report on the Korean economy stated, "Given the negative output gap, the directors welcomed the authorities' current fiscal easing, while some noted that a stronger countercyclical fiscal response may be needed to boost domestic demand."

They also emphasized the importance of resuming fiscal consolidation as growth returns to potential, given the long-term spending pressures associated with an aging population. They also urged the authorities to swiftly pursue structural fiscal reforms, particularly those related to taxation, expenditure efficiency, and pensions, and to adopt medium-term fiscal standards to safeguard long-term fiscal sustainability." The report clearly stated its opposition to "reckless fiscal expansion."

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The IMF stated in its report, "Uncertainty about the outlook remains high, and risks are tilted toward the downside," and labeled the risk as "tilting toward the downside," clearly indicating "downside risks." On the 24th, Korean media outlets changed the IMF report to read, "The IMF report projected that the Korean economy will enter a recovery phase starting in the second half of this year and show a clear recovery in 2026."

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Korean media outlets then changed the report to read, "The IMF projected that this year's growth rate would reach 0.9% due to accommodative monetary and fiscal policies and improved consumer sentiment following the election." They also predicted that "Next year, as domestic and external uncertainties decrease and the effects of policies such as the supplementary budget fully manifest, the growth rate will rise to 1.8%, gradually recovering to the potential growth rate." Most media outlets altered the statement to read, "A clear recovery trend."

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Korean media outlets specifically omitted the part where the IMF report on the 24th recommended "reducing the productivity gap between large and small businesses, simplifying regulations, continuing innovation, and utilizing artificial intelligence." "While next year's growth rate is expected to approach 2%, the report advised that structural reform efforts must continue to achieve the current administration's key economic goal of a 'potential growth rate of 3%.'"

The report, however, "particularly posited that deregulation of the service industry and SMEs, and the adoption of AI are key to long-term productivity enhancement, and welcomed the new administration's various policy efforts to improve productivity and enhance potential growth, including its economic growth strategy." The report was then misrepresented as "AI adoption" and "SME deregulation."

Korean media outlets unanimously reported that the IMF projected that "the Korean economy will enter a recovery phase starting in the second half of this year and show a clear recovery in 2026."

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In contrast, the IMF report stated that "long-term domestic political and global trade policy uncertainties are weighing on short-term growth," and that "growth is expected to rebound to 1.8% in 2026, driven by easing uncertainty, the overall impact of easing policies, and a base effect. The negative output gap is expected to gradually narrow as domestic demand strengthens and exports recover from 2026, easing global trade policy uncertainty." This differs sharply from the Korean media's claim of a "clear recovery," which the IMF attributed to the "reduction of trade uncertainty."

Korean media outlets even distorted the IMF's report to the Lee Jae-myung administration recommending "additional fiscal expansion."

The media outlets unanimously reported, "Regarding Korea's fiscal policy, the IMF assessed that despite the short-term expansion, fiscal capacity and debt levels will remain sound for the next five years."

They also concluded that "given the economic situation, accommodative monetary and fiscal policies are appropriate at this point," and that the spending priorities for the 2025 supplementary budget and the 2026 budget are consistent with IMF recommendations. The IMF noted that additional easing measures could be considered if downside risks materialize, and advised strengthening investment in research and development (R&D) and innovation, which are highly effective in supporting growth."

Newsis reported that day, "Regarding Korea's fiscal policy, the IMF assessed that despite the short-term expansion, fiscal capacity and debt levels will remain sound for the next five years." Furthermore, given the economic situation, the report assessed that accommodative monetary and fiscal policies are appropriate at this point, and stated that the spending priorities in the 2025 supplementary budget and the 2026 budget are consistent with IMF recommendations. In contrast, the IMF report stated, "The directors agreed to easing monetary policy to support domestic demand, but emphasized the need to maintain price stability."

In this regard, the directors emphasized that monetary policy must be agile, well-communicated, and data-dependent, given the high level of uncertainty. The report publicly condemned the government's unilateral "decision-making" to abandon its mandated monetary policy.

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The IMF acknowledged that the financial sector remains generally sound and commended the authorities for proactively addressing financial vulnerabilities in the real estate sector. The directors urged continued monitoring of project financing and asset quality risks, particularly for non-bank financial institutions, and warned of increased non-bank lending.

The IMF continued, "The directors welcomed recent macroprudential tightening measures to alleviate housing market pressures and recommended additional measures, including the accelerated plan to increase housing supply." <It also encouraged the continued reduction of regulatory gaps> and publicly warned of the need to "close the gap."

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In its Global Financial Stability Report released on October 15, the IMF addressed the "foreign exchange market instability" caused by the introduction of AI and the increase in non-bank lending, under the title "Trembling Ground Beneath Calm."

The report warned that "financial stability risks remain high due to asset valuation adjustments, pressure in sovereign bond markets, and the growing influence of non-bank financial institutions," and that "structural changes in foreign exchange and emerging market bonds introduce new risks and resilience into these markets."

The report stated that "financial stability risks remain high due to asset valuation adjustments, increased pressure in sovereign bond markets, and the expanding role of non-bank financial institutions (NBFIs)." It also stated that "despite ample liquidity, the global foreign exchange market remains vulnerable to macrofinancial uncertainty."

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Regarding the increase in government debt, the IMF stated that "shocks could increase funding costs, widen bid-ask spreads, and exacerbate excess exchange rate volatility. These pressures are further amplified by structural vulnerabilities such as currency mismatches, concentrated dealer activity, and increased NBFI participation." <Stress in foreign exchange markets can spill over to other asset classes and tighten broader financial conditions. While local currency sovereign issuance and increased domestic uptake have supported emerging market resilience, excessive borrowing, overreliance on a narrow investor base, and inappropriate policy frameworks can pose financial stability risks.>

The IMF stated that financial instability was driven by "rising government debt, the continued growth of non-bank financial intermediaries (NBFIs) and stablecoins," and that <Markets appear complacent about these developments, but financial stability risks remain high.> The IMF particularly viewed the interaction between these factors as heightening risks.

The report stated, "Valuation models indicate that risky asset prices are significantly exceeding fundamentals, increasing the risk of a sharp correction. The government bond market is under pressure from a widening fiscal deficit. Stress tests indicate that interconnectedness and maturity mismatches between banks and non-bank financial institutions are increasing, potentially amplifying the impact." The report warned of increased instability in economic systems where lending expansion, such as under the Lee Jae-myung administration, overlaps with bank and non-bank PF loans and includes stablecoin issuance, and the overlapping of foreign exchange markets with the lifting of the separation of finance and industry.

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Newsis reported on the 24th under the headline, "IMF Projects 1.8% Growth in Korea Next Year... "Structural Reform Needed to Achieve 3%"."

Chosun Biz reported on the 24th with the headline, "IMF Projects 1.8% Growth for the Korean Economy Next Year... Maintains Previous Forecast."

Yonhap News reported on the 24th with the headline, "IMF Recommends 'Continued Structural Reform Efforts' to Achieve 'Potential Growth Rate of 3%'."

Kyunghyang Shinmun reported on the 25th with the headline, "IMF: 'Korean Economy in Recovery Phase, Clear Uptrend Expected Next Year... Easing Monetary and Fiscal Policies Appropriate."

KBS reported on the 24th with the headline, "IMF: 'Korean Economy to Mark Recovery Next Year... 1.8% Growth'."

MBC reported on the 24th with the headline, "IMF: 'Korean Economy to Enter Recovery Phase in Second Half of This Year, Strengthening Recovery Trend Next Year'."

Kookmin Ilbo reported on the 25th with the headline, "IMF: 'Korean Economy to Enter Recovery Phase in Second Half of This Year'."