Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Korea facing post-pandemic sovereign debt challenges
Finance Minister Hong Nam-ki presides over an economic meeting at the Government Complex Seoul, Monday. Yonhap
By Lee Min-hyung
By Lee Min-hyung
With the Korean government executing an unprecedented super-expansionary fiscal policy throughout 2020 and possibly until 2021, the economy is feared to face a full-blown sovereign debt crisis in the post-coronavirus era.
Such concerns are mounting at a time when not just the government, but households and corporations here are borrowing money at an alarming rate during the pandemic. Experts are wary of the consequences of the borrowing frenzy, with some even raising the likelihood of a downgrade in Korea's sovereign credit rating this year as the government continues expansionary policies to cushion the protracted economic impact of the pandemic.
According to recent data from the Bank of Korea (BOK), household loans here surpassed 1,000 trillion won ($880 billion) in February for the first time ever. As of the end of last month, the balance of household loans extended by commercial lenders reached 1,003.1 trillion won, up by 6.7 trillion won from the previous month, according to data from the central bank. This was the first time that the figure reached the symbolic four-digit level since the central bank started compiling such data in 2004.
Of note is the rapid rise in household debt. The balance surged by 100 trillion won for the past one year after surpassing 900 trillion won in February of 2020.
This was attributable to a debt-fueled buying spree of apartments and stocks amid ultra-low interest rates. The central bank cut the benchmark rate down to 0.5 percent in May 2020, as part of its monetary easing measure to rev up the virus-hit economy.
Aside from the private sector, the government also had to increase sovereign debt issuances to help reinvigorate the economy and particularly businesses in the most vulnerable sector. The government executed three supplementary budgets last year and is now in talks to provide another round of emergency relief payments to the public.
This is expected to increase the sovereign debt level here to an alarming level, according to experts. Data from Rep. Yoon Chang-hyun of the main opposition People Power Party showed Korea's sovereign debt surged by more than six times compared to 2000 to 723.2 trillion won in 2019. It was the fourth-steepest rise among 29 OECD member countries during the same period.
Korea's government debt-to-GDP ratio reached 42.2 percent as of 2019. This is below the OECD average of 110 percent. But economists are voicing concerns over the rapid rise of the figure.
As of Mar. 7, the nation's sovereign debt reached 965.9 trillion won, according to data from the Ministry of Economy and Finance. Given that the pandemic has yet to come to a complete end, the level of sovereign debt is expected to grow further throughout this year.
The planned execution of the fourth round of emergency relief payments will also pose an additional burden on the rising state debt. Some even argue that the sovereign debt may surpass the 1,000-trillion won mark this year if the economy remains in the doldrums after failing to overcome the pandemic crisis.
“The rapid increase in the national debt is very worrisome, even if it may not pose an imminent threat to the possible downgrade of the sovereign credit rating,” Yonsei University economist Sung Tae-yoon said.
He also remained cautious over the government's plans to issue a massive amount of treasury bonds, saying that this will add more burden to the already serious level of fiscal soundness due to a series of fiscal expansion policies.
“Households may have to endure serious financial burdens if the interest rate keeps rising at a time when people invested heavily by taking out non-collateralized loans,” he said.
But Moody's shrugged off concerns over a possible downgrade in Korea's credit rating unless the country faces other unexpected economic crisis following the COVID-19 shock.
“We expect Korea's credit fundamentals to remain strong compared to peers over the next few years, while its fiscal and external buffers impart some resilience to adverse shocks,” the global credit ratings agency said in a recent report to investors.
“The global coronavirus pandemic has affected Korea through a number of channels, including trade, supply chain linkages, investment and tourism,” it said. “We expect the consequent negative impact on Korea's sovereign profile to be limited, although some affected industries and financial institutions face more material credit pressures.”