Heavily indebted government, companies, households complicate difficulties facing Korean economy

It is somewhat inevitable for debts owed by governments, companies and households to increase around the world amid their efforts to cope with the deepening economic impact of the coronavirus pandemic.

South Korea’s economic actors are also saddled with a growing amount of debt. Public- and private-sector debt was growing at an alarming clip before the outbreak of the deadly infectious disease. The COVID-19 crisis is further accelerating the pace.

Since President Moon Jae-in took office in May 2017, his administration has increased fiscal spending faster than its predecessors to help finance expanded welfare programs and offset the negative effects of its ill-conceived policies.

The outbreak of the novel coronavirus here early this year has made the Moon government bolder -- or even reckless from the viewpoint of many critics -- in expanding fiscal expenditure.

It has drawn up three supplementary budgets so far this year in addition to the regular budget for 2020, which is set at a record-high of 512 trillion won ($429 billion), to cope with the fallout from the coronavirus outbreak.

The Finance Ministry plans to issue state bonds worth more than 100 trillion won this year to help fund the three additional spending plans and the annual regular budget, pushing the total national debt above 840 trillion won, or nearly 45 percent of the country’s gross domestic product. Korea’s national debt is expected to exceed 1,000 trillion won within Moon’s five-year presidency.

According to data released last month by the Bank of Korea, the country’s ratio of private-sector debt to GDP stood at 201.1 percent in the first quarter of this year. The figure represents an on-year increase of 12.3 percentage points and an on-month rise of 4.1 percentage points, both of which were the highest since the BOK started compiling the data in 2000.

The central bank estimated debt owed by households and companies in the country at a whopping 3,866 trillion won as of the end of March.

Separate data from the National Assembly Budget Office showed Korea’s household debt-to-GDP ratio climbed by 10 percentage points to 197.6 percent at the end of last year, marking the steepest increase among 41 nations compared in the study by the parliamentary research arm.

Private-sector debt is expected to continue to soar with COVID-19 unlikely to be under control in the months to come.

In its worst-case scenario, the central bank predicts that up to 760,000 local households will go bankrupt this year, while the proportion of companies whose operating profits are insufficient to pay interest on their loans will reach 50.5 percent, up from 32.9 percent at the end of last year.

The private-sector debt-to-GDP ratio is forecast to further rise to 208 percent by the end of 2020.

The simultaneous steep rise in public- and private-sector debt risks further exacerbating and complicating difficulties facing the country’s slumping economy.

With the Korean won not among the world’s key reserve currencies, worsened fiscal soundness could lead to the downgrading of the nation’s sovereign credit rating, increasing borrowing costs for corporations and households as well as the government. State budget planners and ruling party lawmakers should pay heed to warnings that national tax revenue might decrease by more than 50 trillion won from previous estimates over the coming four years in the aftermath of coronavirus-caused shocks.

Mounting debt in the private sector will ultimately reduce household disposable income and undermine companies’ financial health.

Over the long term, it is ineffective and unsustainable to help keep struggling households and businesses afloat mainly by implementing fiscal stimulus measures.

The Moon government should focus on boosting corporate activity particularly by lifting a complex set of regulations it has imposed on companies over the past years in line with its pro-labor stance. Many local firms were already faltering under tough regulatory restrictions at home and deteriorating trade and investment conditions abroad before being hit by the coronavirus impact.

It is also necessary to concentrate financial support on those marginalized companies that have substantive potential to grow beyond the COVID-19 crisis.

Helping enhance corporate profitability and creating more good-paying jobs in the private sector -- not expanding taxpayer-funded public employment -- are efficient and fundamental ways to increase household income and tax revenue.