IMF "Korean Economy Can Handle Shocks... Government Debt Is the Biggest Concern"

"Public Debt Should Be Managed Not to Exceed 60% of GDP"

[Image source=Yonhap News]

[Asia Economy reporters Seo So-jeong and Moon Je-won] The International Monetary Fund (IMF) has assessed that South Korea's basic economic conditions are solid and capable of responding to shocks, but the debt issue remains the most concerning. It particularly emphasized the importance of setting and operating clear goals and standards for fiscal policy amid the recent surge in government debt.

At a press briefing on the 25th during his visit to the Bank of Korea, Krishna Srinivasan, IMF Asia and Pacific Department Director, stated, "Debt has accumulated over the past decades, and while some fiscal policy measures to support vulnerable groups are necessary, these should complement monetary policy. To maintain fiscal policy credibility, it is essential to set an anchor (target) in the medium term." Srinivasan is the successor to Lee Chang-yong, Governor of the Bank of Korea.

Srinivasan said, "I understand that public debt has increased to about 55% of Gross Domestic Product (GDP), so it is important to set fiscal policy goals in the medium term and maintain credibility. For example, South Korea has set a target not to exceed 60% of GDP in debt, and adhering to this target is crucial for fiscal policy credibility."

He added, "After the COVID-19 pandemic, all countries worldwide adopted expansionary fiscal policies to support the poor and vulnerable. Even when implementing such fiscal policies, our advice is to strive to have a budget-neutral impact as much as possible."

He further explained, "Fiscal policy must consistently contribute to achieving debt targets. It is important to concretize the basic framework for medium-term fiscal policy management and to set and follow goals that must be adhered to." According to the IMF, Asia's share of global debt has significantly increased from 25% to 38%. As debt accumulates, concerns about insolvency are rising.

Srinivasan commented, "Regarding household debt, it is true that it is increasing in South Korea, but it is mainly mortgage-related debt, and since measures such as Loan-to-Value (LTV) and Debt Service Ratio (DSR) have been carefully implemented, we assess that household debt risk is low."

[Image source=Yonhap News]

Regarding the possibility of an economic crisis similar to South Korea's 1997 crisis, he explained, "The fundamentals of the Korean economy are generally strong, with net external assets around 40% of GDP. Foreign exchange reserves relative to GDP have expanded significantly to 25%, compared to the 4% range in the 1990s and 2000s." The ratio of short-term external debt has also tripled from 30%, the current current account balance is in surplus unlike the deficit at that time, and the financial sector's resilience is strong. South Korea is expected to record a current account surplus of about 4% of GDP this year.

However, Srinivasan forecasted that South Korea's growth rate will slow next year. He said, "The economic growth forecast for South Korea this year is 2.6%, but the projection for next year has been lowered by 0.9 percentage points to 2% because export growth is expected to stagnate over the next year."

He noted, "With the U.S. tightening monetary policy, the Korean won is not free from the strong dollar. It is one of the currencies with the largest depreciation against the dollar, which is caused not only by the interest rate differential with the U.S. but also by trade shock conditions."

He explained that South Korea was among the first countries in the Asia region to tighten monetary policy and that signs of slowing inflation are emerging. Srinivasan said, "Although growth prospects may decline due to interest rate hikes and tightening, it is important to confront inflation directly." He added, "Consumer price inflation (month-on-month) is showing a downward trend, and after peaking this year, it is expected to return to the target level (around 2%) by 2024."

He also evaluated the South Korean government's liquidity supply measures exceeding 50 trillion won to resolve the funding market tightening triggered by the Legoland incident as "a proactive response." He added, "They are operating stabilization funds in the commercial paper (CP) market and are actively working to prevent the spread of insolvency to other sectors."

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