Concern is mounting over South Korea’s debt management outlook

Concern is mounting over South Korea’s debt management outlook

Even state-run think tanks are concerned about rapidly rising debt without payment resources

Deputy Prime Minister and Minister of Finance Hong Nam-ki attends a parliamentary audit session on October 7, receiving questions about the government’s plan to introduce a fiscal stability rule. (Yonhap)

Despite repeated assurances from the government that South Korea’s sovereign debts are under control, concerns continue to mount not only in the private sector but also among public think tanks, data showed on Monday.

The Korea Institute of Public Finance, a government-funded institution affiliated with the prime minister’s office, recently pointed out that Asia’s fourth-largest economy will see its level of debt without payment resources approaching 900 trillion won (787 , $ 74 billion) over four years, and that this will likely have a negative impact on the country’s credit rating.

“This year, Korea’s total national debt is expected to be around 835.6 trillion won, of which 506.9 trillion won or 60.7% will be debts without payment resources,” Kim Woo said. -hyeon, KIPF researcher, in an assessment report on Korea’s Medium Term Budget Operational Plans for 2020-2024.

While debts with payment resources are likely to be repaid on time, those without payment resources require tax revenue to finance themselves and thus weigh on the country’s fiscal capacity.

In addition, the proportion of debt without payment resources will continue to increase over the next few years, even after the world is expected to gradually emerge from the current COVID-19 pandemic, according to the report.

The corresponding figure is expected to climb to 62.8% in 2021, 64.6% in 2022, 66.5% in 2023 and 67.8% in 2024, amounting to an amount of 899.5 trillion won.

In this scenario, Korea will see its debt without payment resources increase by 392.6 trillion won, or 77.5 percent, over the next four years, reflecting its ever-increasing budget spending requirements and limited tax revenue.

“Mandatory spending is inevitable to increase, as society ages and the social safety net improves,” Kim said.

“Unless (the government) continually adjusts its discretionary spending, the next generation will face a drastically reduced level of budgetary operational capacity.”

The KIPF report also claimed that a rapid increase in national debt could possibly trigger a downgrade in sovereign credit ratings down the road.

Earlier this month, global credit assessor Fitch Ratings maintained Korea’s credit rating at AA- with a “stable outlook,” but also added that the high level of national debt against a backdrop of Spending pressure could be a risk factor for the country’s fiscal conditions.

“(The Korean government) needs to proactively adjust its medium-term fiscal outlook, separate from the short-term fiscal measures currently being implemented to help those reeling from the COVID-19 pandemic,” Kim said.

The Korea Economic Research Institute also voiced a similar concern last week, suggesting that a 1% increase in total national debt equates to a 0.03 notch drop in sovereign credit ratings.

Government officials have repeatedly pointed out that Korea’s debt level is still relatively lower than that of comparable economies, citing the Organization for Economic Co-operation and Development average of 108.9 percent.

Deputy Prime Minister and Minister of Finance Hong Nam-ki, however, expressed some concerns.

“It is true that there is still sufficient fiscal room for maneuver, but we must be careful about the pace of debt increase throughout the process of recovery from the crisis,” said the chief financial officer.

In addition, the Ministry of Economy and Finance announced plans to introduce a fiscal rule under Hong’s leadership to cap the ratio of national debt to gross domestic product. The initial plan is to keep the national debt ratio at 60% or less of GDP, while allowing exceptions in the event of natural disasters and financial crises.

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