Government Debt and Maintaining Fiscal Soundness in Korea

“Been there, done that”, many Korean people would’ve said when they saw Greece seeking for a bailout (support) from IMF (International monetary fund) and EU (European Union) as their government balances heavily deteriorated. Korea not only had experiences in IMF bailout program more than a decade ago, but successfully overcame a difficult period. Even though the world economy is still recovering from a financial turmoil in 2008, these financial meltdowns from Greece and other southern Europe countries could lead to another hard blow for lagging world economy. However, not all countries are running severe deficit on their government balances. Korea is considered to sustain its’ fiscal soundness of government balance. In regards to national government balance and related matters, fiscal affairs department of IMF issued their world economic and financial survey in order to monitor fiscal status of each region and countries. According to the recent issue of fiscal monitor by IMF, the average gross general government debt-to-GDP ratio for advanced economies is forecasted to rise from almost 91 percent at the end of 2009 to 110 percent in 2015. United States and United Kingdom, two countries strongly affected by recent financial crisis shall experience the largest increase of its debt where their growth prospects are weakened than others. On the other hand, for emerging economies, debt-to-GDP ratios are expected to either stay as current level or decline in 2011. Their sustainable growth and lower interest rate contributed to controlling fiscal balance as they pledged.

Hong Kong is projected to reach the lowest ratio by 2015 (0.5%), Australia (20.9%), Korea (26.2%), New Zealand (36.1%), and Switzerland (36.2%) are expected to follow. In comparison, Japan is expected to reach the worst level of debt ratio over GDP in 2015 projecting 250%. Already troubled Greece’s ratio is expected to be increased by 140.4%; Italy (124.7%), United States (109.7%), Portugal (98.4%), France (94.8%), and Spain (94.4%) are among countries projected to have high debt over GDP ratio over years to come.

Compared to other countries, Korean government successfully managed to maintain relatively solid fiscal balance and sustained its level for years. IMF reported that debt-to-GDP ratio is even going to be lower to mid-20% by 2015, which is 2nd lowest ratio among advanced economies.

Regardless of a sunny forecast and positive reports on Korean economy, it is believed that a couple of issues can not be overlooked in order to sustain the stable level of fiscal balance. One of the factors could be spendings on the healthcare system. Since Korea has extremely fast aging demographics, inevitably spendings on healthcare system would increase significantly. Potential tax revenue is expected to decrease due to the low birth rate; this could lead healthcare spendings to become a pretty heavy burden.  Also escalating amount of debt derive from local government shall be monitored.  The recent government study showed that the debt amount of local government estimates approximately KRW 25 trillion (7.96% of total government debt).  Though debt ratio over total government debt is being consistent, debt amount of local governments have grown significantly by 34.15% in 2009 compared to average 4% in previous years. Once local governments are in trouble, it is evident that the central government is to be affected eventually.  Maintaining well-balanced financial status with local government is necessary to consider as well.

Jinmok Kim

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About FSC Korea
The Financial Services Commission has been established for the purpose of protecting the integration of Korea’s financial markets by promoting sound credit system and fair business practices. To this end, the FSC serves as a consolidated policy making body for all matters pertaining to supervision of the financial industry as a whole. To raise the efficiency, the posts of the FSC Chairman and the FSS Governor were separated on March 2008 for clear distinction between policy-making and execution of financial market supervision

7 Responses to Government Debt and Maintaining Fiscal Soundness in Korea

  1. Don says:

    Great summary of today’s fiscal condition of the government. But, what really lacks in this post is the “supply side” of the economics; in other words, just merely glancing at the debt-to-GDP ratio does not really provide a complete view to assess the current fiscal state. It only provides a static view, at best.
    Why aren’t the US Treasury securities plunging in their values, after running this huge monetary expansion program? There might be a number of reasons associated with this, but still lots of investors think that the Americans have tremendous resilience to bounce back; and that greatly stems from consistent and rapid innovation, leadership in technology, entrepreneurship, and so on.
    Does Korea have these same elements, which makes them at least partially immune from adverse external forces? Maybe, but not to the extent where they can certainly promise long-term sustainability.
    I believe there should be more views and information from the other side of the economy.

  2. FSC Korea says:

    Thank you for your thoughtful insight Don, we believe U.S has a completely different situation and does not really fit into this topic, however, there has been talks of huge U.S government debt possibly developing into a risk for quite long time now.
    Economies like Korea, small and very opened, faces pretty high chance of foreign capital outflow. N. Korean provocations can also contribute to market risks although most investors know it’s not a huge factor. As we saw in 1998, and 2008, things can suddenly change for Korea.
    This data and story shows stable and strengthen Korean economy and I think provides quite accurate interpretation.

    -Rak Kwon Choi

  3. FSC Korea says:

    In addition, financial regulators such as, Ministry of Strategy and Finance, Financial Supervisory Services, Bank of Korea and Financial Services Commission just announced new regulations on Foreign Exchange last week, we believe this would help to prevent future capital outflow risks.

    http://www.fsc.go.kr/downManager?bbsid=BBS0048&no=67868

    • Don says:

      I am by no means implying that the author misinterpreted the data. But, the thing I wanted to bring up here was the fact that low debt-to-GDP ratio by itself does not directly mean that the Koreans are running a sound fiscal policy; and when discussing this issue, it always has to be accompanied by whether or not the government’s debt is sustainable in the long term.
      For instance, Greece has lower debt-to-GDP ratio than Japan. But, nobody perceives Japan as equally as troubled as Greece. The reason is, Japan has the capability to service its debt to the lenders, while Greece does not. This largely has to do with the productivity of its labor forces. And the things that are mushrooming in the Korean economy just recently have been discussed ten years ago in Japan, such as healthcare programs and surging local government budgets. While no agencies in the World have a good answer to these questions, the ability to handle these issues differs among countries. US is now in a huge mess with Medicare and Medicaid. What about Korea? The requests for entitlements are ever-increasing while productivity is hovering around the same level for years.
      In short, there will be disproportionately large demands from the public sector to run all kinds of programs, while the resources to support these schemes are keep leveling off or shrinking. That being said, unless the productivity level increases sharply for the next few years, it is very likely that the tax rate will increase in Korea just to keep the budget deficit problem on track.
      Regarding the high fluctuations of capital inflows and outflows, again, there are no clear-cut answers for this one. Probably Koreans should instill in their minds that it is a market where long-term investments make sense. And I believe the perceptions have gotten better.
      Lastly, my suggestion is that Koreans should keep thinking about how to maintain their competitiveness in certain industries and enhance their chances to perform well in high-value added industries; and these all go hand in hand with human capital. Revisit the country’s educational system and reform it in a radical way. Because I firmly believe that is the main reason why Korea is stagnating in growth; it is a well-suited system for a sub $20,000 per capita level, but not for the above level. The first step would be regulating the low-quality private education sector known as cram schools; it is spreading out like a cancer everywhere.

  4. just my info says:

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  5. It’s Nice Post, keep posting and have a nice day… 18:08

  6. john says:

    the same thing all over the world …
    if only we could listen to one simple section written in the constitution:http://snipe.sniperlynx.com/main.php?snipe=548

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