South Korea’s current snowballing budget deficit, fueled by the COVID-19 pandemic “can be offset by gradual consolidation” in coming years, the International Monetary Fund said Thursday.
The remark by Andreas Bauer, Korea mission chief at the IMF, apparently aims to alleviate concerns surrounding the nation’s government debt surged by four rounds of supplementary budgets implemented to finance COVID-19 relief programs.
The sovereign debt is projected reach 956 trillion won ($859 billion) this year, gaining 150.8 trillion won on-year.
“The 2021 budget rightly aims at maintaining an accommodative fiscal policy stance, but there is scope for raising targeted transfers to adversely affected workers and firms and accelerating public investment plans to support the recovery,” Bauer said in a statement conveying the results of its annual meetings with the nation’s financial authorities. The series of meetings took place between Jan. 13 and Tuesday via videoconference.
“A somewhat higher than currently budgeted deficit this year can be offset by gradual consolidation in subsequent years,” he added, in the statement released in English.
Overall, the IMF said it welcomes the government’s proposal to operate fiscal policy within “a rules-based medium-term framework.”
Alongside the growing government debt, the nation’s debt-to-gross domestic product ratio, is expected to reach 47.3 percent in 2021. An increase of 7.5 percentage points from 39.8 percent in the beginning of the year, prompted worries among experts about the momentum of the gain.
On the government’s proposal last year to limit the nation’s debt to 60 percent of its GDP and its fiscal deficit to 3 percent starting in 2025, Bauer said the attempt seems appropriate in terms of effectiveness and sustainability, in a briefing tied to the results of the meetings.
The proposal, which is currently subject to parliamentary approval, drew flak from critics at the time questioning its efficiency and the timeframe in which it would have taken effect in five years.
Noting such concerns as well, Bauer warned that Korea’s aging society could become a negative factor to the budget and lead to further government debt. The government would need to make efforts to maintain fiscal health, he said.
On the nation’s monetary policy headed by the central bank, Bauer said it was “appropriately eased in 2020 and has scope for additional support to underpin the recovery and bring inflation closer to the Bank of Korea’s target.”
The central bank froze its benchmark interest rate after slashing it to a record low of 0.5 percent in May 2020. Bauer said the BOK still has room for “a modest further easing.”
“This could be achieved through a modest further easing, while forward guidance on the likely course of monetary policy could also help ease financial conditions currently,” Bauer said.
The nation’s surging household debt would be a key liability to the nation’s financial system, he added.
Korea’s outstanding household debt, which takes financial loans and credit card-based payment services extended to households into account, came to an all-time high of 1,682.1 trillion won as of September 2020, according to BOK data.
This means that the outstanding debt held by the household sector surged 516.1 trillion won, or 44.2 percent, in merely five years.
In the briefing, Bauer said that Korea‘s financial market is now stable enough to lift its ban on short-selling, which is an investment strategy that bets on share prices falling. The watchdog Financial Supervisory Service temporarily banned the trading practice in March last year, to minimize volatility from the pandemic, but said it would allow it again from March 16.
Earlier this week, the Washington-based organization upgraded its 2021 growth outlook for the South Korean economy to 3.1 percent from its previous estimate of 2.9 percent announced in October.
The Korean economy contracted 1 percent last year, the first retreat in more than two decades, but its contraction was far smaller compared with other major economies in terms of numbers.
By Jung Min-kyung (
mkjung@heraldcorp.com)
