Hankyung Research Institute "Credit Rating Expected to Decline Due to National Debt Ratio Increase in 10 Years"

National Debt Ratio Surpasses Credit Rating Downgrade Threshold of 68.6% to 69.5%

[Asia Economy Reporter Park Sun-mi] Concerns have been raised that South Korea's national debt ratio continues to rise and, if this trend continues, its credit rating could be downgraded within the next 10 years.

On the 16th, the Korea Economic Research Institute (KERI) analyzed the impact of national debt ratio, economic growth rate, GDP per capita, and inflation rate on national credit ratings using data from 36 OECD countries (excluding Portugal and Costa Rica). They concluded that a 1 percentage point increase in the national debt ratio lowers the national credit rating (based on Moody's) by 0.049 to 0.051 points.

The International Monetary Fund (IMF) forecasts that South Korea's national debt ratio will increase by an average of 2.81% annually from next year through 2027. If South Korea's national debt ratio rises by 2.81% annually from next year, the threshold national debt ratio at which the national credit rating would be downgraded by one notch is estimated to be between 68.6% and 69.5%. It is projected that in 2032 and 2033, the national debt ratio will reach 68.7% and 70.6%, respectively, potentially causing a one-notch downgrade in the national credit rating.

KERI also analyzed the impact on economic growth if South Korea's national debt ratio reaches the threshold and the national credit rating is downgraded by one notch (Moody's standard, from Aa2 to Aa3). The analysis showed that a one-notch downgrade in South Korea's national credit rating would reduce the economic growth rate by 0.58 percentage points. Based on the 2021 real GDP (1,910.7 trillion KRW), this translates to a GDP loss of approximately 11.1 trillion KRW.

KERI assessed that amid slowing growth potential, the rapid increase in welfare spending and strengthening of social security benefits due to rapid aging could create an environment where South Korea's national debt ratio rises rapidly. International credit rating agencies have already cited the sharp rise in South Korea's national debt ratio as a pressure factor on its national credit rating.

Choo Kwang-ho, Director of Economic Policy at KERI, emphasized, “To manage the national debt ratio stably, it is necessary to increase GDP and control national debt,” adding, “Efforts are needed to enhance corporate vitality through deregulation, tax support, labor reform, and easing anti-business sentiment, while legislating strict fiscal rules.”

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