WASHINGTON: The International Monetary Fund on Sunday revised upwards its predictions for economic forecast in South Korea, forecasting that gross domestic product would shrink by just 1.75 percent for 2009.

"Faced with a sluggish recovery in demand from trading partners, and highly leveraged households and SMEs (small and medium enterprises), Korean growth is projected at -1.75 percent in 2009 and 2.5 percent in 2010," the IMF said in its annual report on the country's economy.

Just a month earlier, on a trip to Seoul, IMF officials indicated they were expecting GDP to shrink by three percent in 2009. In February, officials were even less upbeat, predicting a four percent contraction for the year.

The forecast for 2010 is unchanged from the July predictions.

Among the risks factored into their forecast, the IMF cited "a distinct possibility that weak global exports will weigh on Korean growth well beyond 2010."

"Other risks to the outlook are another bout of global risk aversion, rising oil prices, or -- on the upside -- a stronger impact from stimulus measures in Korea and abroad," the report said.

The IMF said South Korea's won remains "undervalued," despite its recent appreciation of close to 30 percent in the last five months against the dollar.

"Directors took note... that the won is undervalued relative to its medium-term equilibrium level, and expected this trend to be reversed as capital inflows regain momentum," the report said.

The group added that "the weak won redirected domestic demand from imports to domestic production," adding that "the current global crisis has highlighted the urgency of rebalancing Korea's growth toward the nontradable sector."