Snowballing debt raises alert over Korea's fiscal soundness

By Lee Kyung-min

The rapid increase in government debt over the past few years is raising concerns on fiscal soundness, an issue that requires greater attention in a country whose treasuries denominated in Korean currency could quickly lose buyers amid increased “risk-off” sentiment, experts said Monday.

A slew of relief packages designed to fight the COVID-19 pandemic aside, absent-mindedly resorting to debt issuance to finance welfare initiatives would significantly erode the resilience of the financial system in the long term, they noted.

The Ministry of Economy and Finance is downplaying such concerns, saying that the country's debt-to-GDP ratio, hovering around 40 percent, is well below the OECD average of 109 percent.

Yet clearly lacking in the assertion is the steep rise ― as sharp as 20 percent year-on-year ― in state/government debt, a major red flag to most global investors. Government debt includes debt owed by both central and regional administrations.

A tailspin in the foreign exchange market could ensue, for example, if they ditch won-denominated debt for others issued in major currencies including the U.S. dollar, British pound, euro and the Japanese yen.

“The Korean currency is not among the eight major currencies, and the government should formulate fiscal plans accordingly,” said Seoul National University professor of economics Kim So-young.

The government printing money may sound the easiest and most effective way to help those in need of quick cash, but the situation is widely different in the global financial market.

“Global investors are willing to take on debt issued in major currencies because they expect market demand will be stable ― albeit volatile, which is not necessarily true for Korean won-denominated debt. The country finding no buyers in time could quickly develop into a downright default,” he said.

Record-high figures

Data from the National Assembly Budget Office showed government debt stood at 769 trillion won ($629 billion) as of Monday, with per capita debt of 14.84 million won. This is up from 731 trillion won in 2019 and 680.5 trillion won in 2018.

More problematic is that 2020's figure is set to rise further due to a third extra budget drafted to fight against the COVID-19 pandemic, compounded by the two previous ones designed to tackle the economic fallout from the drawn-out U.S.-China feud.

Throwing in the first two extra budgets, the figure increases to 819 trillion won, pushing up the debt-to-GDP ratio to 41.4 percent.

Adding in the envisioned 30 trillion won slated for the third bill, the number spikes to 850 trillion won, with the ratio climbing to 44.4 percent, up 6.3 percentage points from a year earlier.

This is a 14.2 percent year-on-year increase, the sharpest since 16.4 percent in 2009 following the global financial crisis.

Rep. Choo Kyung-ho of the main opposition United Future Party estimates the figure will rise to 879 trillion won when considering the drop in tax revenue brought on by the pandemic.

In this case, the ratio will jump to 46.5 percent, up 8.4 percentage points. The year-on-year increase will be 20.6 percent, the highest since 2005 when the figure was 21.7 percent.

When including bonds issued by state-run companies, the total national debt backed by the government reached a record high 1,098.4 trillion won in May, up 78.3 trillion won from the end of 2009.

Once debt level rises, bringing it down is much harder, a reason why the government should exercise extreme caution in managing it, according to another economist.

“It is all about how people think,” Seoul National University professor of economics Lee In-ho said.

He added that the due date may not come in the immediate near future but that does not mean it is not coming, although most people consider the issue some distant problem that only concerns policymakers.

“More government debt means a higher probability of a government credit downgrade and the country's currency plummeting in value. Crises of these magnitudes would not be felt as immediately by the ordinary people, but will be eventually when companies downsize in an economic meltdown,” he added.

The ruling Democratic Party of Korea, the government and Cheong Wa Dae plan to hold a meeting in the last week of May to discuss the speed and extent of government spending for 2020. A final draft alongside a five-year budget plan will be submitted to the National Assembly in September.