Sovereign Debt-to-GDP Ratio Rises to 41.2%
The South Korean government has prepared a supplementary budget of 11.7 trillion won in order to cope with the spread of COVID-19. The sovereign debt-to-GDP ratio of South Korea is likely to increase by 1.4 percentage points to 41.2 percent as a result.
A total of 10.3 trillion won out of the supplementary budget is scheduled to be financed by bond issuance. Half of the rest will be derived from the Bank of Korea’s surplus fund and the rest will be prepared from extra national funds. In other words, approximately 90 percent of the supplementary budget is debts.
The total sovereign debt of South Korea is estimated to increase from 805.2 trillion won to 815.5 trillion won and the government’s fiscal deficit ratio is slated to increase from 3.5 percent to 4.1 percent with a total deficit of 82 trillion won. The ratio has topped 3 percent only in 1999 (3.5 percent) and 2009 (3.6 percent), when global financial crises occurred. The government’s total budget revenue is forecast to decrease from 481.8 trillion won to 479.2 trillion won. On the other hand, its total expenditures are predicted to increase by 8.5 trillion won to 520.8 trillion won.
The South Korean government has regarded a sovereign debt-to-GDP ratio of 40 percent and a fiscal deficit ratio of 3 percent as upper limits at which its fiscal soundness can be maintained. Last year, President Moon Jae-in stressed that the government’s fiscal conditions were not bad, saying that budget execution based on the government’s plan would not lead to a sovereign debt-to-GDP ratio of over 40 percent. Still, the government came up with the supplementary budget in the end, and this reflects how serious the coronavirus situation is.
While acknowledging the necessity of the supplementary budget, experts asked the government to spend it in a highly effective way. “The supplementary budget is a kind of emergency assistance, which means more financial support for small businesses and companies will be of more help,” said Dankook University economics professor Kim Tae-ki, adding, “A decline in consumption is going on due to widespread anxiety and the government needs to block the spread of the virus itself rather than distributing vouchers.”