[Editorial] Quasi-national debt

By Korea Herald
  • Published : May 2, 2012 - 18:45
  • Updated : May 2, 2012 - 18:45
The process of writing the 2013 budget bill starts this month, with government agencies set to have submitted budget requests by May 31. The budget officers at the Ministry of Strategy and Finance will then review the requests, start consultations with the agencies and fix budget allocations ― a time-consuming process that will continue until a final report is prepared for submission to the president on Sept. 21.

The guiding principle for the 2013 budget bill is to ensure the government lives within its means. By balancing the budget, the Lee administration aims to lay the foundation for its successor to produce budgetary surpluses and succeed in pushing the ratio of national debt to gross domestic product below 30 percent by 2015. It certainly is an ambitious goal, given that the ratio stood at 34 percent as of the end of last year.

Few will question that the 2013 spending plan will fall within the revenue projections, given the Lee administration’s determination to balance the budget. As it submits the bill to the National Assembly on Oct. 2, the Lee administration aims to repeat the Kim Dae-jung administration’s achievement of writing a balanced budget bill in its final year in office after pulling the nation out of a financial crisis.

But such an outstanding achievement, when realized, will be overshadowed by an objectionable legacy of the Lee administration ― a huge increase in the liabilities of state-run corporations, a quasi-national debt which its critics demand be included in the national-debt statistics. If combined, the debt would rise to 71.6 percent of GDP ―- well above the 50 percent level below which the OECD is calling on advanced nations to reduce their national debt in the long term.

The total liabilities of 286 state-run corporations and agencies soared 86 percent during four years under the Lee administration ― from 249 trillion won in 2007 to 463.5 trillion won at the end of last year. The liabilities grew by 61.8 trillion won in one year to surpass the national debt, 420.7 trillion won, for the first time last year.

State-run corporations cannot be solely held accountable for their snowballing debt. Instead, the Lee administration has to shoulder much of the responsibility, given that it has relied heavily on the state-run corporations to finance many of its pet projects.

Among them are LH Corp. and Korea Water Resources Corp., which had to borrow heavily to finance public housing and river reclamation projects, respectively. Other instances include: Korea Deposit Insurance Corp. added 13.3 trillion won to its debt in 2011 to clean up the mess after several savings banks went belly up; and Korea Electric Power Corp. and Korea Gas Corp. respectively took 10.4 trillion and 5.7 trillion won in additional loans, mainly because they were not permitted to raise their charges despite soaring energy costs.

The administration denies that the upsurge in the debt of the state-run corporations will create any serious liquidity problem, with more than 80 percent of their loans maturing in a year or longer. Moreover, it says, their assets exceed their liabilities by far.

But international credit rating agencies take their ballooning debt very seriously. Moody’s Investors Service, which upgraded South Korea’s sovereign credit rating outlook in early April, reportedly hinted at downgrading South Korean state-run corporations’ credit ratings.

Many of the state-run corporations are rated higher than warranted by their performances, as they ride on the back of the Korean government, whose credit is rated as stable. But Moody’s is reportedly considering decoupling their credit ratings and downgrading them, raising their borrowing costs.

The Lee administration, now in its final year in office, may not have much to do even if it wishes to undo its mistake of forcing state-run corporations to undertake big-ticket projects on its behalf. Still, it will have to review their finances carefully and demand they submit amortization plans and commit themselves to them.

It would be meaningless for the administration to lower the ratio of national debt to GDP if the debt of state-run corporations were to grow as fast as it has in the past.