Wed. Oct 27th, 2021

South Korea’s Economy Updates

South Korea has proposed a budget for 2022 that will sustain aggressive fiscal spending to try to deal with the fallout from the pandemic, as Asia’s fourth-largest economy struggles to cope with an increase in coronavirus infections.

The Ministry of Finance on Tuesday proposed to spend Won604.4 tons ($ 523 billion) in 2022, an increase of 8.3 percent from 2021 which would increase government debt to 50.2 percent of gross domestic product, from 36 percent in 2017 when President Moon Jae- took office.

The aggressive fiscal approach has raised concerns about the sustainability of the country’s stimulus spending, but Moon argued that policy should be maintained to deal with a Covid-19 crisis caused by vaccine card.

“We still have a long way to go for the full recovery, and the active role of fiscal spending is still urgently needed to tackle massive changes, including restructuring the global supply chain and changing international trade order,” Moon said during a cabinet meeting said.

The record spending was announced as the government struggled to suppress household debt and rising income inequality. Last week, South Korea became the first major Asian economy raise interest rates since the start of the pandemic in an effort to stem possible financial imbalances due to rising debt levels and rising property prices.

The bulk of the proposed budget for 2021 will be spent on expanding welfare benefits, creating jobs and developing emerging technologies that can drive growth.

South Korea is on track for 4 percent GDP growth this year, as growing exports of electronic products, cars and ships helped save the country from recession last year.

Despite the increase in exports, the recovery of the labor market remains slow with domestic consumption being hit by stricter Covid restrictions as health authorities struggle with the Delta coronavirus variant.

Addressing growing inequality amid signs of an asset bubble has become a deciding factor for the presidential election scheduled for March next year. Many self-employed people, who make up almost a third of the workforce, are under increasing financial pressure after stricter coronavirus restrictions, including stricter social distancing measures, reduced their income.

Moon said South Korea could maintain its enlargement policy, citing the government’s relatively sound fiscal status. According to IMF data, the gross debt ratio of the general government in 2025 will still be less than a third of Japan and half of that for the US.

However, some experts have expressed concern about the rapid pace of rising debt as the country faces long-term challenges, such as a rapidly aging population and the lowest birth rates in the world, which could rapidly increase South Korea’s fiscal burden in the coming decades.

‘It’s not a short-term risk factor, as the government still has room for more spending. Its debt ratio is still much lower than that of other advanced countries, ”says Park Seok-gil, an economist at JPMorgan. “But the government may have to adjust the pace of debt growth in the long run, as South Korea may follow Japan’s growth process.

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