Bloated national debt; Korea’s total public sector debt was estimated at about 821 trillion won; Korean economy is also saddled in enormous household debt worth nearly 1,000 trillion won and 1,500 trillion won in corporate debt

February 24, 2014 Leave a comment

2014-02-16 16:51

Bloated national debt

Korea’s total public sector debt was estimated at about 821 trillion won as of the end of last year under a new international standard recommended by the International Monetary Fund (IMF). The newly calculated debt, owed by both central and local governments and non-financial state companies and organizations, represents 64.5 percent of the country’s gross domestic product (GDP).
So far Korea’s national debt has been scaled at 504 trillion won, about 39.7 percent of GDP, excluding the debt obligations of all state firms. Given the intermittent controversy over the precise level of our public sector debt, it’s right for the Ministry of Strategy and Finance to adopt the IMF’s new guidelines ― for the first time in the world. To be sure, this change will help enhance the transparency of our fiscal soundness.
But even the new figure may not reveal the true picture of our sovereign debt woes. That’s because it does not include the 467 trillion won in future pension payments for retired government officials and soldiers and the 145 trillion won in government-guaranteed debt obligations.
While it’s true that there’s no need to exaggerate the debt level, this is no time for complacency, considering that the Korean economy is also saddled in enormous household debt worth nearly 1,000 trillion won and 1,500 trillion won in corporate debt. In short, it can be said that the three main agents of our economic activity are under mountain-high debts.
It’s no secret that a number of European countries came to the brink of collapse as a result of lax debt management. Korea is increasingly looking in the same direction, given the array of populist welfare pledges coming from our political leadership.
To avoid our own fiscal crisis, the finance ministry has vowed to lower the ratio of government debt to GDP to about 35 percent by 2017, down from the 39.7 percent as of last year. State firms will also be forced to cut their debt-to-equity ratio to less than 200 percent.
But stopgap measures won’t be valid any longer. To begin with, the central government and the National Assembly need to introduce an integrated management system concerning debt owed by municipal governments. It’s also a welcome development that the Ministry of Safety and Public Administration plans to introduce a bankruptcy system for local governments.
The central government, for its part, should carry out state projects with taxpayers’ money and refrain from passing on these responsibilities to debt-ridden state companies.
There also might be a need to set a ceiling on the growth of debt like the U.S.

Filed under Macro Trends

Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a comment