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Balanced budget vital for S Korea's rebounding economy

SEOUL: South Korea's rebounding economy could falter in the years ahead unless a balanced budget is achieved to reduce the government's soaring debt load, economists said.

"The government had no choice but to incur a lot of debt in order to restructure the financial and corporate sector," said Jung Han-young, an economist at Korea Institute of Finance.

"With the economy rebounding, the government now needs to focus on achieving a balanced budget and reducing the debt level to promote sustainable economic growth," he said.

In order to recapitalise insolvent banks and provide extensive deposit insurance, the government poured 64 trillion won ($58 billion) into a financial system left prostrate by a financial crisis that hit in late 1997.

It has also ended up shouldering a mountain of bad debt via the state Korea Asset Management Corporation, a chunk of which is a result of the dissolution of Daewoo Group under the weight of its 89 trillion won debt -- about 29 trillion won more than its assets.

South Korea's economy posted its highest economic growth in 12 years in 1999, expanding 10.7 percent year on year following a contraction of 6.7 percent in 1998.

Finance Minister Lee Hun-jai said he expected the rapid growth to continue, forecasting GDP growth of over 10 percent year on year in the first quarter of 2000.

The figures reflect the country's successful recovery from near bankruptcy in late 1997 but economists say it is time to assess the cost of the recovery and begin the process of working off the debt generated.

Total debt issued by Korea's central and regional governments ballooned to 108 trillion won by the end of 1999 from 66 trillion won at the end of 1997, when the country got agreement on a record $58.35 billion bail-out led by the International Monetary Fund.

At 23 percent of South Korea's GDP, the debt figure is still far below the 45 to 50 percent for other Organisation for Economic Cooperation and Development (OECD) countries.

But economists point out the total excludes debt guaranteed by the government, such as that guaranteed for the Korea Asset Management Corp and Korea Deposit Insurance Corp, the two state agencies financing the financial sector's restructuring.

The Finance Ministry said total debt rises to 190 trillion won when taking into account guaranteed debt.

"That is not a threatening amount, but what concerns me is that the country is likely to see budget deficits for the next several years," Jung said.

Economists say the government cannot continue to run heavy budget deficits with the debt burden as large as it already is, underscoring that the Finance Ministry needs to take steps now to ensure it meets its stated goal of a balanced budget by 2004.

Oh Jung-hoon, a senior economist at LG Economic Research Institute, said the government could reach a balanced budget, even a surplus, by 2004, but that it would depend largely on the economic performance.

"If the economy grows by seven percent for the next several years, the increased tax should allow the government to reach a budget balance or even a surplus by 2004," he said.

"But there is always a possiblity of an economic downturn, so the government should begin considering taking other measures now to reduce the budget deficit."

The Korea Institute of Public Finance, a government-run think tank, voiced its concerns about the soaring national debt in a recent report, and urged the government to increase the tax base to achieve a balanced budget.

"If the current trend of budget deficit continues, the country faces bankruptcy 15 years from now," the report warned.

It recommended the government reduce this year's fiscal deficit to 1.7 percent of GDP from 2.7 percent in 1999 and 3.2 percent in 1998.

The report said policymakers should bolster the tax base rather than raising taxes, which could hurt domestic consumption, and do away with programmes aimed at relieving the burden of middle- and lower-income wage earners.-Reuters