SEOUL– South Korea’s finance minister said Tuesday global credit appraisers are concerned about the growth pace of the country’s national debt, which could negatively affect its sovereign rating over the medium term.
Finance Minister Hong Nam-ki also reiterated his opposition to political parties’ push for sharply jacking up a proposed extra budget of 14 trillion won (US$11.7 billion), citing concerns about fiscal soundness.
Ahead of the March presidential election, political parties are calling for a sharp rise in the size of the supplementary budget to 35-50 trillion won, to better support pandemic-hit merchants.
With the proposed extra budget, the national debt is forecast to reach 1,075.7 trillion won this year and the debt-to-GDP ratio is expected to rise to a record high of 50.1 percent, according to the government’s estimate.
Hong expressed opposition to the parties’ demand, saying that a sharp hike in the budget size is feared to further hurt fiscal health.
“The debt-to-GDP ratio could increase by 2 percentage points from the ministry’s estimate if the budget size is increased to 35 trillion won,” Hong told a parliamentary meeting.
He said credit ratings agencies are concerned that the government’s proposed fiscal rule has yet to receive parliamentary approval and the national debt has risen at a faster pace.
Last month, Fitch Ratings said a sustained rise in the country’s government debt ratio could affect Asia’s fourth-largest economy’s sovereign rating over the medium term. It said Korea’s shift toward expansionary fiscal spending and tolerance of fiscal deficits appear to be becoming more “entrenched.”
Fitch has reaffirmed South Korea’s sovereign rating at “AA-,” the fourth-highest level on the agency’s table, with a “stable” outlook.
In October 2020, the finance ministry unveiled a proposal that will limit the government debt to 60 percent of gross domestic product (GDP) and its fiscal deficit to 3 percent starting in 2025. The new rule is still pending at the National Assembly for approval.
“There are concerns about things that are beyond control, something like the latest extra budget proposal,” Hong said of credit agencies’ assessment on South Korea’s fiscal health.
In January, the finance ministry proposed this year’s first extra budget to support small merchants hit hard by the protracted pandemic. The country’s seventh extra budget aimed at coping with COVID-19 will be financed with debt sale worth 11.3 trillion won.
“If this (raising the amount of the extra budget) is realized, the issue of fiscal health will arise and we’re also greatly concerned about its impact on inflation,” he added.
Hong said the growth of consumer inflation is expected to stay high in the first half amid surging energy costs.
“The government will make all-out efforts to stabilize inflation at the 2 percent growth range in the second half so as to achieve the yearly target,” Hong said.
In January, consumer prices rose 3.6 percent from a year ago, compared with a 3.7 percent on-year gain in December last year. Consumer inflation grew more than 3 percent for the fourth straight month.
The finance ministry forecast the 2022 consumer inflation to grow 2.2 percent. South Korea’s consumer prices grew 2.5 percent last year, the steepest growth in 10 years, due to the high prices of farm and oil products. The central bank aims to keep annual inflation at 2 percent over the medium term.
Source: Yonhap News Agency