Public Enterprises like KEPCO Saw 34 Trillion Won Debt Surge in One Year... Government Debt Fueled by Price Caps

Ministry of Economy and Finance 'Results of 2021 General Government Debt (D2) and Public Sector Debt (D3) Calculation'

[Asia Economy Sejong=Reporters Kim Hyewon and Lee Dongwoo] Last year, the national debt encompassing central and local governments as well as public institutions swelled simultaneously, which is interpreted as a result of the continued expansionary fiscal policy to respond to COVID-19. Additionally, the surge in debt of public enterprises such as Korea Electric Power Corporation (KEPCO), caused by the government and political circles suppressing increases in public utility fees like electricity and gas, also contributed to the deterioration of fiscal soundness.

According to the results of the "2021 General Government Debt (D2) and Public Sector Debt (D3) Calculation" announced by the Ministry of Economy and Finance on the 15th, the general government debt (D2), which includes central and local governments and non-profit public institutions, surpassed 1,000 trillion won for the first time in history. Its share of the gross domestic product (GDP) also rose to 51.5%.

While the national debt (D1) indicator, commonly referred to as "government debt," is for internal use, D2 is used by international organizations such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) to compare debt between countries. The ratio of D2 to GDP rose from 40% in 2018 to 42.1% in 2019, 48.7% in 2020, and surpassed 50% for the first time last year. This level is close to the average of major advanced non-reserve currency countries such as Sweden and Norway (56.5%).

Most of the D2 last year, amounting to 975.7 trillion won, was debt incurred by the central government accounts and funds. The government issued 110.4 trillion won in treasury bonds last year and increased borrowings by more than 12 trillion won, including housing and urban fund subscription savings. The increase in local government debt was 7.4 trillion won. Debt of educational autonomous bodies decreased by 1.7 trillion won due to favorable trends in education finance grants.

Adding the debt of non-financial public enterprises, D3 grew so large that its ratio to GDP approached 70%. The absolute scale of D3 was recorded at 1,427.3 trillion won, an 11.5% (147.4 trillion won) increase from the previous year. The ratio to GDP rose from 66% in 2020 to 68.9%, up 2.9 percentage points.

The main reason for the increase in D3 is that the government issued many treasury bonds to respond to COVID-19, which increased D1 and D2, but it is important to note that pure non-financial public enterprise debt also rose by 31.6 trillion won (0.2 percentage points) compared to the previous year. In particular, the debt of central non-financial public enterprises increased by 33.9 trillion won to 403.6 trillion won compared to the previous year. This was due to KEPCO and its power generation subsidiaries increasing borrowings and issuing corporate bonds up to their limits to secure operating funds. Debt of KEPCO and its power generation subsidiaries alone increased by 11.6 trillion won year-on-year, reaching about 113.7 trillion won. Korea Gas Corporation also increased its debt by 5.8 trillion won in borrowings and bonds within one year, accounting for 30 trillion won in D3. This phenomenon occurred because public utility fee increases, such as electricity rates, were not implemented timely for political reasons.

The problem is that for KEPCO, it is practically difficult to raise electricity rates enough to eliminate deficits next year. According to KEPCO, increasing the electricity rate by 1 won per kWh (kilowatt-hour) can reduce debt by 500 billion won annually. Therefore, to eliminate KEPCO's accumulated deficit of 30 trillion won this year, electricity rates would need to be raised by about 60 won per kWh annually. The government raised electricity rates by a total of 19.3 won this year, including the base fuel cost and fuel cost adjustment charges. It is highly likely that a similar increase will be maintained next year for the sake of stabilizing people's livelihoods. The financial industry expects KEPCO's debt ratio to soar from 223.23% last year to 424.9% this year and 617.04% next year.

The government intends to focus on strengthening fiscal soundness management, including legislating fiscal rules next year, but the problem lies in the high hurdle of the National Assembly. The Ministry of Economy and Finance stated, "We will promote the prompt legislation of fiscal rules and the reform bill for local education finance grants, and prepare follow-up legislative measures. Based on long-term fiscal forecasts, we will diagnose risk factors of our fiscal system and establish mid- to long-term fiscal strategies such as 'Fiscal Vision 2050' to resolve them."

International organizations and major credit rating agencies are also closely monitoring Korea's future fiscal burden risks and share the view on the necessity of fiscal management. The OECD stated in its economic outlook last month that "to alleviate high inflationary pressures and prepare for rapid aging, the National Assembly needs to adopt fiscal rules." Fitch commented, "Long-term expenditure needs due to aging are a medium-term credit rating pressure factor," and "the newly introduced fiscal rules will help manage public sector debt risks."

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