By Cho Jin-seo
Staff Reporter
Traces of economic crisis are hard to find in Seoul. New buildings are rising in every direction, whether it is a glass-and-steel commercial building or a gigantic apartment complex.
But also rising rapidly over the city's dusty air is the debt load of the government, companies and residents.
The "spend now, worry later" policies of the Lee Myung-bak administration have helped South Korea recover its growth momentum quickly. But what is waiting for Koreans after the happy spending spree is over are piled up debts, which they will have to repay someday along with heavy interest.
The audacity in borrowing money is most apparent in the public sector. On Tuesday, the Namgu District Office of Busan said it issued 2 billion won in emergency bonds in order to pay its employees. "We are underfinanced. We didn't have money," said the district spokesman Thursday.
It is rare for such a minor administrative unit to borrow money for general purposes. The two main reasons for Namgu's budget deficit were a tax cut on real estate, and the building of a 43-billion won district headquarters, which is probably extravagant for a district with less than 300,000 residents.
The Namgu case symbolizes the general budget conditions in the public sector. During the financial crisis, President Lee expanded the national budget and reduced property and corporate taxes. As a result, the budget shortfall reached minus 4 percent of the nation's gross domestic production (GDP) in 2009, according to The Economist Intelligence Unit.
This is far better than that of ailing economies such as the United States (-10 percent), Britain (-14.2 percent) or Greece (-13 percent), and the government will try to balance it this year. But people need to read between the lines, said Kwon Young-sun, an economist at Nomura International.
"The government's budget is supposed to be reduced by 3 percent this year, but state-owned companies increased their budgets by 37 percent. In total, this means a 2.5-percent increase in actual spending by the state this year," he said.
The total amount of debt at state-controlled companies had already grown to 177 trillion won in 2008 from around 100 trillion won in 2005. The Korea Land & Housing Corporation (KL&HC) alone had its debt tripled to 52 trillion won in the three-year period. This mound of debt is going to rise further, as President Lee wants the KL&HC to buy more land for his development projects and sell it cheaply to private companies.
Official data show that the central and regional governments were liable for 365 trillion won in debt as of December, which amounts to 35 percent of GDP. But when debts of state-owned companies and pension funds are included, the liability swells to 1,209 trillion won, or 116.8 percent of GDP. Not all of this is payable in the near future, but the interest alone is a huge burden on the economy.
The situation in the private sector is worrisome as well. "South Korea has a high level of corporate debt in comparison to both its regional partners and economies of similar size," said Oxford Analytica, a research firm, Wednesday.
One reason for this dependency on debt is the low interest rate. The ratio of corporate debt to GDP increased from 83.1 percent in 2005 to 112.8 percent at the end of 2008, the firm said. The Financial Supervisory Service also revealed that firms are now opting for issuing corporate bonds more than stocks to raise new funds. Between 2008 and 2009, the amount of new corporate bond issuance increased 40 percent, while the number of new stock offerings remained slightly decreased.
"The post-crisis scenario presents opportunities for South Korean companies to decrease their historically high indebtedness levels. However, attaining the delicate balance between promoting corporate de-leveraging and maintaining growth will be a challenge for the authorities," the research firm said.
Residents also have a more relaxed attitude about getting loans. Encouraged by the low interest rate and rising asset prices, people are borrowing from banks to invest in stocks and real estate. According to Samsung Economic Research Institute, the portion of interest payment to household income is at its highest point since 2003. As a result, the value of stocks purchased with credit has reached 5 trillion won, the highest since last September, according to the Korea Exchange. Those investors may hope the stock market continues to rise and the interest rate on the borrowed money stays low, but neither of those is certain to happen.