Global evaluators worry about fallout from South Korea’s debt growth pace: CFO

SEOUL, 08 Feb. (Yonhap) — South Korea’s finance minister said Tuesday that global credit assessors are concerned about the country’s growing pace of public debt, which could negatively affect its sovereign rating in the medium term.

Finance Minister Hong Nam-ki also reiterated his opposition to pressure from political parties to sharply increase a proposed supplementary budget of 14 trillion won ($11.7 billion), citing concerns over fiscal strength.

Ahead of the presidential election in March, political parties are calling for a big increase in the size of the supplementary budget to 35 trillion won, to better support traders affected by the pandemic.

With the proposed supplementary budget, the national debt is expected to reach 1.075.7 trillion won this year and the debt-to-GDP ratio is expected to reach a record high of 50.1 percent, according to the government estimate.

Hong voiced his opposition to the parties’ demand, saying a big increase in the size of the budget could further damage fiscal health.

“The debt-to-GDP ratio could increase by 2 percentage points from the ministry’s estimate if the size of the budget is increased to 35 trillion won,” Hong told a parliamentary meeting.

He said credit rating agencies were concerned that the government’s proposed fiscal rule had yet to receive parliamentary approval and that the national debt was growing at a faster rate.

Last month, Fitch Ratings said a sustained rise in the country’s public debt ratio could affect the sovereign rating of Asia’s fourth-largest economy in the medium term. He said Korea’s shift toward expansionary fiscal spending and tolerating fiscal deficits appears to be becoming more “entrenched.”

Fitch reaffirmed South Korea’s sovereign rating at “AA-“, the fourth highest level on the agency’s chart, with a “stable” outlook.

In October 2020, the Ministry of Finance unveiled a proposal that will limit public debt to 60% of gross domestic product (GDP) and its budget deficit to 3% from 2025. The new rule is still pending approval at The national assembly.

“There are concerns about things that are spiraling out of control, something like the latest supplementary budget proposal,” Hong said of the credit agencies’ assessment of South Korea’s fiscal health.

In January, the Ministry of Finance proposed the first additional budget this year to support small traders hit hard by the prolonged pandemic. The country’s seventh supplementary budget to deal with COVID-19 will be funded by a debt sale worth 11.3 trillion won.

“If this (the increase in the amount of the supplementary budget) is realized, the question of fiscal health will arise and we are also very concerned about its impact on inflation,” he added.

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