Is Korea’s fiscal health sound?

By Cho Jin-seo

The national debt has once again become a hot debate issue for the Korean economy, as lawmakers attacked the Ministry of Strategy and Finance for its optimism on the debt level of the state and state-owned firms.

The central argument is whether the swelling debts at state-owned companies, which are not counted in the official national debt accounting, are properly monitored and controlled.

Representatives from the National Assembly raised their voices at the annual inspection of the finance ministry on Monday and Tuesday, saying that the current national debt accounting report is delusive.

Leading the pack of the critics was Grand National Party Rep. Park Geun-hye, who is the leading candidate for the next presidential election. Park opened fire on officials of the finance ministry on Monday.

“We need to put a name tag on every debt at state firms, so we can find out who is responsible for it,” she said. “We need to measure how fast those implicit debts are growing, and set up countermeasures.”

That measurement was soon provided by her colleague Lee Han-goo from the same party on Tuesday. Lee claimed that Korea’s national debt amounted to 1637.4 trillion won, when including implicit items such as the debts at state-owned companies and future pension deficit. The official state debt, measured by the definition of the International Monetary Fund, was 359.6 trillion won.

“The possibility is high for a national debt crisis when a nation has a large implicit debt,” he said. “The government has said it would reform state companies, but in fact they are only increasing debts at those firms.”

Finance minister Yoon Jeung-hyun replied that the ministry will closely monitor the situation, though it does not plan to include those debts at the state firms into the national account.

According to the lawmakers, the quasi-sovereign debts at the state firms have increased dramatically under the Lee Myung-bak administration, because the companies increased spending as part of the government’s fiscal expansionary policies during the financial crisis. The most controversial cases involve K-Water, the government water management agency, and LH, the land and housing agency.

Lee, the GNP lawmaker, also criticized the finance minister for being too optimistic on the future balance sheet of the country.
The finance ministry recently published its 5-year fiscal plan report, where it assumed an annual national output growth of 5 percent from next year. Under the plan, the government aims to achieve fiscal balance in around 2013.

But the lawmaker pointed out that the growth forecast is only 3.8 percent in a report from Samsung Economic Research Institute, the largest private think tank in Korea. Even government institutions such as the Bank of Korea and Korea Development Institute have projected a growth rate of around 4.5 percent for next year. On a national scale, a half percentage point difference makes a huge difference to the fiscal deficit.

The national debt has been a tricky problem for policymakers and economists, as there is no clear definition of what to count and what not to, and as each country has unique systems and problems.

When compared by widely used international standards, Korea marks well. According to the CIA Factbook, it is ranked 99th among 129 nations in terms of the ratio of public debt to the gross domestic product (GDP), which means the country’s balance sheet is healthier than most other nations in the world.

Last month, the Korea Institute of Public Finance said that Korea comes first in its rankings of fiscal soundness among OECD nations. “South Korea’s government debt-GDP ratio is low compared to that of economically advanced nations. It also has good marks in three other criteria, such as the difference between the growth and interest rates,” the report had said.

But most economists agree that the situation could rapidly deteriorate in the future. There are many reasons to worry, such as fiscal expansionary policies and loose monitoring of “implicit” debts. Another potential risk is the increasing deficits of public pension funds. Lee, the GNP lawmaker, estimates that the national pension deficit is increasing at 12.4 percent on average every year since 2003.

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