"Snowballing Interest and Credit Rating Downgrade Shackles" Debt Tsunami Warning

Economic Experts' Urgent Diagnosis
Most Agree with Deputy Prime Minister Hong Nam-gi's Debt Warning
National Assembly Increases Budget by 40 Trillion, Demands 54 Trillion

Professor Kim Jeong-sik: "National Debt Ratio Approaching 60% D2 Standard"
Professor Lee In-sil: "Concerns Over Rising Interest Costs Due to National Debt"
Professor Ham Jun-ho: "Household and Corporate Debt Exceeding Critical Threshold"

[Asia Economy reporters Seo So-jeong, Son Seon-hee in Sejong, and Moon Je-won] As the National Assembly demands increasing the supplementary budget (추경) submitted by the government at a scale of 14 trillion won up to a maximum of 54 trillion won, concerns among economic experts are growing. A high national debt ratio could act as an economic tsunami by driving up market loan interest rates due to a surge in government bonds, increasing the risk of household debt among ordinary citizens, and even causing a downgrade in the country's credit rating.

We sought opinions from economic experts regarding concerns raised by Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki that expanding the supplementary budget as demanded by the political circles could lead to a downgrade in the national credit rating, fiscal sustainability issues, and interest rate hikes.

◆National debt ratio approaching 60% based on D2 standard= On the 10th, Kim Jung-sik, emeritus professor of economics at Yonsei University, told Asia Economy over the phone, "The government's national debt ratio announced by the Ministry of Economy and Finance is currently based on D1 (central + local government debt), but if measured by the general government debt (D2) used for international comparisons, it is estimated to approach 60%," adding, "At this level, it is a crisis level." South Korea's national debt ratio relative to GDP was 36% when the Moon Jae-in administration took office in 2017, but if the 14 trillion won supplementary budget passes the National Assembly, it is expected to reach a record high of 50.1%.

If the political circles' demand for a 40 trillion won increase is met and fully financed by issuing government bonds, the national debt ratio will soar to 52%. Professor Kim pointed out, "In Latin American countries without a key currency, foreign exchange crises occurred at debt ratios of 40-50%," and "In the Eurozone, a debt ratio above 60% is considered a danger signal." Professor Jang Yong-sung of Seoul National University's Department of Economics also said, "Public enterprise debt is not included in our government's debt, but many public enterprises such as subway corporations are currently running deficits," adding, "If public enterprise debt is included in government debt and future demographic changes are considered, the fiscal situation could be more serious than we know."

On the other hand, some argue that concerns are excessive given that South Korea's fiscal spending is not large compared to major countries. Jeong Kyu-cheol, head of the Economic Outlook Office at KDI, said, "During the COVID-19 crisis, South Korea's fiscal spending was not large compared to major countries, so there is a need for it," and added, "Concerns about the current national debt level are somewhat excessive, but we can respond comprehensively by considering social structural environments such as entering an aging society."

Deputy Prime Minister for Economy Hong Nam-ki attended the plenary session of the Special Committee on Budget and Accounts held at the National Assembly on the 7th and gave a proposal explanation regarding the supplementary budget bill. Photo by Yoon Dong-ju doso7@

◆Will the supplementary budget increase lower national credibility?= If the supplementary budget increases rapidly due to the prolonged COVID-19 pandemic, national debt will surge, foreign exchange reserves will decrease, and this could negatively affect the country's creditworthiness. The three major international credit rating agencies, including Fitch, maintained South Korea's sovereign credit rating at AA- at the end of last month but warned that "South Korea's national debt will be a pressure factor on the credit rating." Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki mentioned at the National Assembly Budget and Accounts Special Committee plenary session on the 8th, "We will soon have consultations with rating agencies such as Moody's and Fitch in the first half of the year, and I am concerned." Amid the Federal Reserve's tightening countdown, the 3-year maturity government bond yield exceeded 2.3% on the 8th for the first time in 3 years and 9 months due to concerns over the supplementary budget increase.

Professor Lee In-sil of Sogang University Graduate School of Economics said, "If 40 trillion won is financed through 10-year bonds, annual fiscal interest expenses will exceed 1 trillion won," adding, "The reason national debt was less problematic until now was because the interest rates on government bonds were low, so interest cost burdens were not large, but interest costs will increase going forward." It is forecasted that the surge in government bonds will raise market loan interest rates, increasing the risk of household debt and acting like a tsunami. Professor Lee expressed concern, "A surge in government bonds ultimately affects household debt, worsening difficulties for financially vulnerable and economically weak groups." If 40 trillion won liquidity is released into the market, it will also affect inflation. Professor Kim warned, "In Latin American countries such as Argentina, foreign exchange crises occurred due to a vicious cycle of inflation and wages," adding, "There is a possibility that South Korea could face the same."

◆Rising inflation pressures interest rate hikes= Professor Kim Sang-bong of Hansung University's Department of Economics said, "40 trillion won is an amount difficult to handle in South Korea's situation," and added, "As the with-COVID era approaches, we should reduce money supply rather than increase it and return to the pre-COVID situation." Professor Jang Yong-sung of Seoul National University also said, "Spending after the supplementary budget is also a problem," and pointed out, "It should be concentrated on those severely affected by COVID-19 such as restaurants, sports, leisure, and arts, but allowing the supplementary budget without a clear plan on how to spend it could lead to blind money." He explained that if the economy recovers while inflation is high, people will start spending money they had postponed, which will not only fail to help the original purpose of the supplementary budget but also act as a factor pressuring interest rate hikes.

Concerns about the increase in national debt due to the supplementary budget are pouring in from the academic economics community as well. According to the Korean International Economics Association and the Korea Institute for International Economic Policy (KIEP), Professor Ham Jun-ho of Yonsei University emphasized in a presentation paper at the '2022 Joint Economics Conference' held on the 11th, "South Korea's macro (private and government) leverage level recently expanded to 254% of GDP," and stressed, "With household and corporate debt already estimated to have exceeded the excessive debt threshold, government debt is also rapidly increasing, so preemptive management is urgent." Professor Ham's analysis is that in a situation where the possibility of private debt insolvency is increasing, care must be taken to prevent rigid government spending expansion from leading to structural fiscal deficits.

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