South Korea’s major parties are now engaged in a fierce competition to put forward as many populist pledges as possible for the 2024 budget in a bid to win more votes ahead of next year's general election.
The problem is that rival parties are so focused on their own political survival and vested interests that they seem too busy to heed serious warnings from international experts about the need for structural reforms to grapple with festering economic risks.
Among a flurry of warnings, there are two reports about Korea that deserve particular attention: one from the International Monetary Fund and the other from the Institute of International Finance. Both reports were released Sunday.
The 2023 Article IV Consultation report on Korea, based on an IMF team’s visit to Korea from Aug. 24 through Sept. 6, outlines challenges and outlooks for the country, including the need for pension reform.
“Pension reform is needed to safeguard long-term fiscal sustainability and alleviate old-age poverty,” the IMF said in the report. “A rules-based fiscal framework would help anchor public finances.”
The state’s pension fund is set to confront more problems in the future, mainly an intractable demographic crisis marked by plunging birth rates, an aging population and longer lifespans. Without drastically overhauling the pension system, the IMF warned, “By 2075, public debt-to-gross domestic product would be projected to go up by around 200 percent.”
The debt problem is not limited to the government’s handling of the pension system. According to the report released by the IIF, Korea’s debt-to-GDP ratio in non-financial firms was 126.1 percent in the third quarter, the third highest among 34 economies surveyed after Hong Kong and China.
In addition, Korea’s corporate debt ratio in the third quarter grew by 5.2 percentage points from the previous quarter, marking the second-fastest gain.
Global monetary tightening that keeps interest rates at a high level and foments a sluggish economy at home and abroad is said to have aggravated the financial status of more companies.
Burgeoning corporate debt has continued in the fourth quarter, as well. Data from the country’s five major banks show that outstanding corporate loans totaled 766 trillion won ($594.9 billion) as of Nov. 16, up 62.6 trillion won from the level at the end of December 2022.
Affected by expanding debt, a growing number of companies are going bankrupt. The IIF report said the insolvency rate in Korea was about 40 percent as of October, the second-highest level among the 17 economies assessed in the survey.
Unfortunately, the warnings about the double whammy -- worsening fiscal soundness and snowballing corporate debt -- have largely been ignored by Korean politicians, many of whom are trying to appeal to voters in their constituencies.
The Yoon Suk Yeol government and the ruling People Power Party slashed the research and development budget for next year, but the main opposition Democratic Party of Korea reversed the cut by adding about 800 billion won to the budget. The party is also earmarking extra money for regional projects favored by its lawmakers, including party leader Lee Jae-myung.
Equally troubling is the People Power Party’s demand for an increase in state budget for the young and elderly, such as health insurance expansion and meals support -- the so-called populist pledges that contradict President Yoon’s firm opposition against acts of vote-buying in the ruling party.
Ten standing committees of the National Assembly have so far completed the review of the 2024 budget and called for an increase of 9 trillion won in total. Given that other committees are yet to finish deliberating the budget details, the amount of the net increase in budget is expected to rise further.
As Korea faces challenges in various fields such as pension reform, fiscal policy and corporate debt, it is time for policymakers to heed the IMF’s advice, which stresses the importance of “renewed structural reform momentum.”
