South Korea’s government debt is growing at an alarming rate. The International Monetary Fund (IMF) reported that the country’s government debt growth rate was the second highest among 11 non-reserve currency countries over the past decade.
At this rate, government debt is expected to exceed the country’s annual gross domestic product (GDP) in 20 years. This troubling trend is driven by sluggish tax revenues caused by an aging population and declining birthrates, while social security expenditures are expected to rise.
South Korea’s government debt-to-GDP ratio stood at 55.2% last year, according to the IMF Fiscal Monitor released last month. The ratio rose 17.5 percentage points from 37.7% in 2013, marking the second-largest increase among 11 non-reserve currency countries after Singapore’s 63.9 percentage points.
Government debt refers to the combined debt of the government and non-profit public institutions, such as national research institutes, and is used for international comparisons. National debt, on the other hand, includes both central and local government debts. Korea’s national debt-to-GDP ratio, compiled by the government, was 50.4% last year, compared to the IMF’s government debt-to-GDP ratio figure of 55.2%.
Non-reserve currency countries include 37 nations classified by the IMF as advanced economies that do not hold one of the eight reserve currencies, such as the dollar, euro, or yen. These countries include Singapore, South Korea, New Zealand, Norway, Hong Kong, the Czech Republic, Israel, Sweden, Andorra, Denmark, and Iceland. While reserve currency countries can manage their debts by printing more money, non-reserve currency countries face higher risks as their currencies are less widely accepted than the dollar or the yen.
Last year, Korea’s government debt-to-GDP ratio was lower than that of the G7 countries like Japan (252.4%), the U.S. (122.1%), and Germany (64.3%). But considering Korea’s status as a non-reserve currency country, difficulties may arise in the future. Fitch, an international credit rating agency that previously viewed Korea’s fiscal health positively, noted at the end of last month that the country’s national debt had risen rapidly and surpassed 50% in a short period. As a result, South Korea’s fiscal situation is no longer seen as a positive factor in its sovereign credit rating evaluation.
Bloomberg Intelligence (BI), a research arm of Bloomberg, predicted in a recent report that Korea’s government debt-to-GDP ratio will hit the 70% mark around 2030 and reach 100% by 2045. The country’s national debt-to-GDP ratio is expected to rise even faster, reaching 120% by 2050.
BI pointed out that Korea’s shrinking labor force, attributed to a rapidly aging population and low birth rates, will diminish tax revenues. At the same time, social security and healthcare costs are increasing, making government debt a more problematic issue in 20 years.
The report cites interest rates as the most significant variable affecting Korea’s government debt-to-GDP ratio. If interest rates rise by 1 percentage point above the baseline scenario of 2%, the ratio could soar to 141% by 2050. Conversely, if the interest rate is 1%, the ratio could drop to 101%. If the rate is 0%, it could fall to 83% over the same period.
Korea’s interest payment costs, which rose from 0.9% of GDP in 2022 to 1.4% last year, are expected to rise to 2.4% of GDP by 2050, according to BI.
