"Q1 National Total Debt 4686 Trillion Won, 2.4 Times GDP"

[Asia Economy Reporter Kim Hyewon] This year, South Korea's total national debt in the first quarter reached 4,685.5 trillion won, exceeding 2.4 times the gross domestic product (GDP). Concerns have been raised about the excessive speed of debt ratio increase, prompting calls for measures to enhance growth potential and the legalization of fiscal rules to promote public-private deleveraging (debt reduction).

The Korea Economic Research Institute (KERI) announced this on the 18th through an analysis titled "Trends and Implications of Debt-to-GDP Ratios by Economic Agents."

Total Debt of Government, Households, and Corporations in Q1 Exceeds 4,685.5 Trillion Won, 2.4 Times GDP

According to the Bank for International Settlements (BIS), as of the first quarter of this year, South Korea's total debt combining the three major sectors?government, households, and corporations?stood at 4,685.5 trillion won, surpassing 2.4 times the estimated current GDP for this year by BIS.

By sector, government debt including non-profit public institutions was 821 trillion won, household debt was 1,843.2 trillion won, and corporate debt was 2,021.3 trillion won. The total debt-to-GDP ratio for the three sectors in Q1 was 243.7%, with government at 42.7%, households at 95.9%, and corporations at 105.1%. In terms of absolute size of total debt-to-GDP ratio as of Q1, South Korea ranked 19th among 28 OECD countries, slightly lower than the United States (264.6%) and Europe (265.7%).

KERI pointed out that the problem lies not in the absolute level of the total debt ratio but in the rapid pace of increase. Ranking the increase in debt-to-GDP ratios by sector from 2017 to Q1 2020 among 43 BIS member countries, including 28 OECD countries, South Korea's increase was 25.8 percentage points, the second fastest after Chile's 32.5 percentage points. Furthermore, the ranking of debt ratio increase by economic agent was households first, corporations (non-financial) third, and government fourth.

Increase in Debt-to-GDP Ratio OECD Rankings = Households 1st, Non-Financial Corporations 3rd, Government 4th

KERI analyzed that South Korea's top rankings (1st to 4th) in debt ratio increases among households, corporations, and government within the 28 OECD countries were influenced by factors such as the rise in mortgage loans, decline in corporate operating surpluses, and deterioration of fiscal balance ratios.

The sharp rise in household debt ratio was attributed to increased housing transactions, with nationwide housing sales rising from 293,000 units in Q4 last year to 325,000 units in Q1 this year, leading to a 15.3 trillion won increase in mortgage loans compared to Q4 last year, according to KERI. Meanwhile, the increase in non-financial corporate debt ratio was due to increased working capital demand amid poor business performance, such as a decline in operating surpluses compared to the previous year caused by economic recession. The rise in government debt ratio was largely due to the fiscal balance ratio turning into a deficit.

KERI expressed concern that increased debt among households, corporations, and government could hinder economic growth potential and, if debt grows excessively, could lead to risks of fiscal or financial crises. Therefore, it emphasized the need to promote public-private deleveraging, taking caution from South Korea's recent high ranking in total debt growth relative to GDP among OECD countries.

Promote Public-Private Deleveraging through Growth Enhancement and Legalization of National Debt and Fiscal Rules

As a private deleveraging measure, KERI argued that rather than artificial debt reduction involving economic agents' hardship, a better solution is to enhance growth potential by creating a business-friendly environment that increases incomes of economic agents. It also added that government debt deleveraging should be pursued through the legalization of national debt and fiscal rules.

This is because, when including non-profit public institutions, the public sector, and public pension liabilities, the national debt-to-GDP ratio reached 106.3% as of 2018, and even private debts such as household debt could become a burden the government must bear if conditions worsen. KERI emphasized that policies to enhance growth potential, such as creating a business-friendly environment, would lead to increased tax revenues and contribute to government sector deleveraging.

Choo Kwang-ho, Director of Economic Policy at KERI, stated, "The recent rise in non-financial sector credit ratios relative to GDP ranking 1st to 4th among OECD countries by economic agent is a matter of great concern for South Korea, which is not a key currency country and has high external dependence." He added, "It is necessary to promote growth by implementing corporate-friendly policies such as regulatory reforms and to pursue public-private deleveraging by legalizing fiscal rules."

This content was produced with the assistance of AI translation services.