Debt spirals at state-run corporations

The size of government debt still keeps Korea from a sovereign debt crisis, but the alarmingly increased amount of debt raised by government-run corporations is a cause for concern, experts said yesterday.

Korea`s governmental debt stood at 360 trillion won ($307 billion) in 2009, accounting for 35.6 percent of the total GDP, the Bank of Korea said.

Although it was the fastest increase since compiling of the figure began, the amount in relation to GDP barely makes half of the G20 average, which is 75.1 percent.

"Given Korea relied on expansionary fiscal policy to drive its way out of the financial crisis, the increase isn`t a surprise and the amount itself doesn`t seem to pose a threat for now," said Kim Dong-yul, a research fellow at Hyundai Economic Research Institute.



Credit rating agency Moody`s kept the Korean government at an A2 rate when it downgraded several other countries` sovereign ratings. Japan has the highest ratio of debt to GDP, 219 percent, but experienced less rattles on the surface compared to Greece and Spain due to its "lower ratio of foreign debt, like Korea does," said Kim.

Real concerns are with debt held by government-run corporations and semi-government agencies.

When the sovereign debt includes debt raised by government-run corporations the amount hikes up to 69 percent of the GDP.

A total of 24 corporations using Socially Overhead Capital such as the Korea Land & Housing Corporation are responsible for 174.1 trillion won as of 2008 year-end. If government projections are correct, only the largest 10 of them will be responsible for almost double the amount by 2012.

"Since most developed countries don`t include liabilities of state-related enterprises in calculating the sovereign debt, we shouldn`t compare the financial soundness on just the figure," said Park Young-joon, head of international macro economics at the Korea Institute for International Economic Policy.

"It is ultimately tax-payers` baggage in the case of default.

Korea should include debt from government-run corporations to better manage the risk," said Ok Dong-suk, a professor at the University of Incheon.

Rapid ageing of society and costs of unification are other causes for grave concern.

The International Monetary Fund projected that Korea will be burdened with an extra 13.4 percent of the government budget for the elderly in 2050, compared to 2000. For the same period, it predicted the United States and Japan to have 2.9 and 3.1 percent of increased financial burden respectively.

"If the two Koreas unify, the massive GNP difference between the two will cause economic turmoil. South Koreans earn 38 times more than North Koreans," said an official at the Ministry of Strategy and Finance.

The government should find sources of tax revenue for those risks and avoid unnecessary expenditure made in government-run corporations, said analysts.

(cynthiak@heraldm.com)







By Cynthia J. Kim