Korea’s Fiscal Health Crisis: Credit Rating Pressure and Future Outlook

The ratio of national debt to GDP is rising rapidly, and the consolidated fiscal deficit ratio is also on the increase

Concerns are mounting both domestically and internationally about South Korea’s fiscal health. Rapidly increasing national debt and rising welfare spending due to an aging population are major issues. This post analyzes the current state of South Korea’s fiscal situation, the potential impact on its credit rating, and possible solutions moving forward.

South Korea's Deteriorating Fiscal Condition

In recent years, South Korea’s fiscal indicators have significantly worsened. The ratio of national debt to GDP is rising rapidly, and the consolidated fiscal deficit ratio is also on the increase. Jeremy Zook, Asia-Pacific Director at Fitch Ratings, has warned that these trends could exert gradual pressure on South Korea’s credit rating.

The main causes of South Korea’s fiscal deterioration are the expanding welfare spending driven by an aging population and the large opposition party's push for expansionary fiscal policies. The proportion of mandatory expenditures, which the government cannot easily adjust, is increasing, leading to a structural reduction in available financial resources despite any efforts to tighten the belt.

International Concerns and Credit Rating Outlook

Various international organizations, including the International Monetary Fund (IMF) and Standard & Poor’s (S&P), have expressed concern over South Korea’s fiscal situation. The IMF forecasts that the ratio of government debt to GDP in South Korea will jump from 48.7% in 2020 to 59.4% by 2029. This increase poses a significant threat to the country’s creditworthiness.

Kim En Tan, Senior Director at S&P, has indicated that if debt levels rise significantly, it could weaken the country’s credit rating. Bloomberg Intelligence has also pointed out that South Korea’s government debt could reach unsustainable levels within the next 20 years. Such conditions represent a severe long-term risk to the stability of the Korean economy.

Measures to Ensure Fiscal Health

To address these challenges, the South Korean government is pursuing the introduction of fiscal rules. These rules are designed to ensure that fiscal deficits do not exceed 3% of GDP, which could help in managing fiscal health over the medium term. Jeremy Zook noted that the introduction of fiscal rules could positively impact fiscal health, though it may not immediately improve the credit rating. The key is maintaining a healthy fiscal state to mitigate long-term risks. However, the relevant legislation has been stalled in the National Assembly for four years, reflecting a lack of progress.

Future Economic Outlook for South Korea

Despite the fiscal challenges, South Korea’s strong semiconductor industry and current account surplus remain significant strengths. Zook highlighted that South Korea possesses dynamic and globally competitive companies, which support the macroeconomy and external financial stability. These factors are expected to continue supporting the country’s credit rating.

South Korea’s economy is projected to grow by 2.6% this year, largely due to improved export performance. However, domestic consumption remains weak due to high interest rates, and the Bank of Korea is expected to start cutting rates soon.

South Korea’s fiscal health is currently in a precarious state, with rapid debt growth and increased welfare spending posing serious challenges. These issues could negatively impact the country’s credit rating in the long term. It is crucial for the government to implement effective fiscal management strategies, including the introduction of fiscal rules, to secure the country’s financial stability. As the nation navigates these fiscal challenges, reinforcing fiscal health and preparing for future economic uncertainties remain vital.