THE memory of the November 1997 economic crisis still carries weight in South Korea.
Faced with the risk of sovereign default, the country turned to a massive bailout led by the International Monetary Fund (IMF) after having failed to push through painful domestic reforms in earlier years.
While it is often recorded simply as one of many turbulent incidents or accidents, the warning signs had been building for quite some time.
In the months before the bailout request, financial instability was already spreading across East Asia, and a series of warnings pointed to South Korea’s structural weaknesses and urged caution.
At home, key indicators – including the current account balance, the won’s exchange rate, stock prices and broader measures of economic sentiment – were all flashing signals of unease.
In denial
Yet policymakers at the time did not respond with sufficient caution. Instead, they tended to dismiss outside warnings as biased or ill-intentioned. Some even framed them as deliberate attacks.
Senior officials, including top economic aides to the president and the finance minister at the time, publicly insisted that South Korea’s economic fundamentals were sound and that there was little cause for concern.
The chief presidential aide on economic policy emphasised even a month before the bailout request that all the warning calls were ill-founded and that the country’s economic fundamentals were strong.
South Korea was eventually able to recover from the crisis much faster than most had expected, repaying IMF loans ahead of schedule, carrying out restructuring and regaining growth momentum to join the ranks of major economies.
In hindsight, some of the official statements at the time may have been intended to calm markets and prevent panic.
Nearly three decades later, it is worrying to see a familiar pattern reemerge as a recent IMF Fiscal Monitor report has drawn renewed attention to South Korea’s fiscal path, putting the government’s response under scrutiny as much as the numbers themselves.
The fund said in its April report that South Korea is likely to face a significant rise in its government debt ratio in the coming years.
The fund noted some improvement compared with its previous outlook, but still singled out South Korea, along with Belgium, as a country where the pace of debt increase stands out.
It projected that South Korea’s general government debt-to-gross domestic product ratio, known as D2, will rise rapidly to exceed 60% within three years and reach around 63% by 2031.
This D2 measure includes not only central and local government debt but also liabilities of non-profit public institutions, allowing for cross-country comparisons.
The IMF publishes such assessments twice a year based on its regular reviews of fiscal conditions, meaning the April report was not an ad hoc event.
South Korea’s absolute debt level is not yet at a point that signals an imminent crisis, but what stands out is the pace of increase, which has been among the fastest in the world in recent years.
Covid-19 pandemic-related spending explains part of the rise, but so does the broader difficulty of restoring stronger growth momentum, which serves as the denominator.
The more immediate controversy, however, lies in how the government reacted to the widely accepted and regularly published report.
Senior officials at the presidential office dismissed the IMF assessment as overly alarmist, using expressions that suggested the report was designed to provoke fear.
The budget minister also pushed back, describing the outlook as excessive.
Their argument is not without merit, as fiscal sustainability cannot be judged by headline debt figures alone and must take into account future growth prospects and medium-term fiscal conditions.
Ageing population
At the same time, officials acknowledged underlying risks, including rapid population ageing and ongoing concerns about the sustainability of the national pension system.
Still, the tone of the response is hard to ignore, as it does not replicate the events of 1997 but echoes them in the tendency to react defensively to external warnings rather than engage in a measured and constructive way.
South Korea’s debt ratio has indeed been rising faster than that of many peers, a trend that inevitably raises questions about the outlook.
There is an element of irony in the current debate, too, as many of today’s policymakers and ruling party figures were once vocal critics of rising government debt, warning that fiscal expansion could trigger a crisis and sharply attacking the government of the time.
At that time, the debt ratio was below 40%, whereas now it is already as high as around 60%.
It is reasonable to argue that what matters is not the level of debt itself but whether the economy can sustain it, since the debt ratio reflects both the size of liabilities and the scale of economic output for a year.
If economic growth outpaces debt accumulation, the debt ratio can stabilise or even decline over time.
But that is precisely where the debate should focus, as the issue is less about whether the IMF’s projections are perfectly accurate than about the selective way external assessments are received within the government and political community.
Similar warnings were once embraced and used to criticise the government, yet now they are largely dismissed.
If those earlier positions were politically motivated, that should be acknowledged, and if they were based on genuine concern, the same standard should apply today. In either case, consistency matters.
More importantly, repeated references to growth potential must be backed by tangible results.
For years, successive governments have struggled to lift South Korea’s underlying growth capacity, and acknowledging that record would be a more credible starting point than disputing projections.
What is needed now is not a debate over tone, but a clear and practical plan to strengthen the economy’s long-term trajectory while encouraging constructive debate on the growth of government debt, which no one can deny is too fast. — The Korea Herald/ANN
Yoo Choon-sik worked for nearly 30 years at Reuters, including as chief South Korea economics correspondent, and briefly as a business strategy consultant. The views expressed here are the writer’s own.
