🚨 South Korea Ranks #1 in Debt Among Non-Reserve Currency Advanced Countries
Today Korean Economic News for Beginners | 2025.10.20
0️⃣ Fastest Growth Rate, Approaching 64% by 2030
📌 IMF Fiscal Monitor Shows Warning Signs for South Korea's General Government Debt Ratio and Growth Speed, Recommends Medium-Term Fiscal Reform
💬 The International Monetary Fund (IMF) released its October Fiscal Monitor showing that South Korea's general government debt (D2) ratio is estimated at 53.4% of GDP this year. Excluding special cases like Singapore and Israel, South Korea has the highest debt level among non-reserve currency advanced countries. The bigger problem is the speed of increase. South Korea's general government debt ratio is expected to rise from 39.1% in 2016 to 64.3% in 2030, a 25.2 percentage point increase over 14 years. This is about twice the average increase for advanced countries (12.8 percentage points). The IMF urged that medium-term fiscal rules, revenue expansion, and spending restructuring are urgently needed before aging-related welfare spending pressures become severe.
1️⃣ Easy Understanding
South Korea's debt is growing faster than other advanced countries, raising alarm bells. Among countries that don't have globally trusted currencies like the dollar or euro, South Korea has the highest debt level, and it's growing the fastest.
First, let me explain what "general government debt (D2)" means. The "national debt" we often hear about in the news only counts money borrowed directly by the central and local governments. But D2 includes all the debt from public institutions too. When comparing countries internationally, D2 is commonly used because public institutions' debt will likely become the government's responsibility eventually.
This year, South Korea's D2 is 53.4% of GDP. Simply put, the country's debt is more than half of what the country earns in a year. Looking at this number alone, you might think "only half, that seems okay," but there are two problems.
The first problem is that South Korea is a "non-reserve currency country." Reserve currencies are money like the US dollar or European euro that are widely used and trusted around the world. The US and Europe can pay their debts with their own money even during crises, and investors actually want to buy dollars or euros during emergencies. But the Korean won is different. When a crisis comes, investors sell won and try to convert to dollars, causing exchange rates to spike and interest rates to rise.
Among non-reserve currency advanced countries, only Singapore (164.8%) and Israel (67.2%) have higher debt ratios than South Korea, but these are special cases. Singapore has huge overseas assets through its sovereign wealth fund, so its net debt is almost zero. Israel has high defense spending due to special security situations. Excluding these countries, South Korea has the highest debt ratio among non-reserve currency advanced nations.
The second problem is the speed of increase. In 2016, South Korea's D2 was 39.1%. But by 2030, it's expected to reach 64.3%. That's a 25.2 percentage point increase over 14 years, nearly twice the advanced country average increase (12.8 percentage points).
Why is it growing so fast? The biggest reason is aging. South Korea is aging at the fastest rate in the world. As the elderly population grows, welfare spending on pensions, healthcare, and nursing care automatically increases. At the same time, working-age people decrease, meaning fewer people to pay taxes. In this situation, it's politically very difficult for the government to cut welfare spending.
Another problem is the "interest burden." As debt grows, interest payments grow too. Right now interest rates are low so the interest burden isn't huge, but if interest rates rise or economic growth falls, the interest burden could snowball. Economists call this the "r-g problem," where r is the interest rate and g is the economic growth rate. When interest rates are higher than growth rates (r > g), debt automatically keeps growing.
The IMF made several recommendations to the Korean government. First, they said Korea needs to create medium-term fiscal rules. Fiscal rules are "laws that set limits on how much government debt can grow." Second, they said Korea needs to find ways to collect more taxes. Third, they said Korea needs to cut unnecessary spending and use money more efficiently.
In short, South Korea has received a warning that if it doesn't start managing its finances systematically now, while debt is growing too fast, there could be big problems later.
2️⃣ Economic Terms
📕 General Government Debt (D2)
General government debt (D2) is an indicator that combines central and local government debt plus debt from non-profit public institutions.
- It's a broader concept than national debt (D1) and is mainly used for international comparisons.
- Public institution debt is included because the government will likely be responsible for it eventually.
- This is why D2 appears larger than D1 for the same year.
📕 Reserve Currency and Non-Reserve Currency
Reserve currencies are widely used in international transactions and as reserve assets, with the US dollar and European euro being prime examples.
- Reserve currency countries can easily raise funds in their own currency even during crises.
- Non-reserve currency countries have relatively less demand in foreign exchange markets, leading to high exchange rate volatility.
- The Korean won is a non-reserve currency, so securing dollars can become difficult during crises.
📕 r-g (Interest Rate-Growth Rate Gap)
r-g represents the difference between the real interest rate (r) and real economic growth rate (g).
- When r > g continues, a "snowball effect" occurs where government debt automatically increases.
- When interest rates are high or growth rates are low, debt ratios rise faster even with the same fiscal deficit.
- Many countries are seeing r-g turn positive as global interest rates normalize.
📕 Fiscal Rules
Fiscal rules are legal regulations on government fiscal operations, setting upper limits on debt or deficits.
- The European Union operates rules limiting fiscal deficits to 3% of GDP or less.
- South Korea has fiscal rule provisions in its National Finance Act, but specific numbers haven't been set yet.
- Rules help maintain fiscal soundness despite political pressure.
3️⃣ Principles and Economic Outlook
✅ Why Debt Growth Speed is Dangerous
Let's analyze specifically why South Korea's debt ratio is growing faster than other advanced countries and why this is problematic.
First, the relationship between interest rates and growth rates is changing. The past 10+ years were an era of low interest rates. Because rates were very low, interest burden wasn't heavy even when the government borrowed money. Also, as the economy grew, tax revenue increased, making debt relatively easy to manage. But the situation has changed recently. Due to global inflation, central banks in various countries raised interest rates, and it seems unlikely we'll return to the ultra-low interest rate era of the past. At the same time, South Korea's economic growth rate is gradually declining. In the past, annual growth averaged over 5%, but now it's fallen to the 2% range.
Second, structural spending increases due to aging are inevitable. As of 2025, South Korea has already entered an aged society (14% or more of population 65+), and by 2030 it's expected to become a super-aged society (20% or more). As the elderly population grows, pension spending automatically increases. The National Pension deficit will begin in earnest from the 2030s, and the fund is expected to be depleted in the 2050s. Medical and long-term care costs will also surge. Medical costs per person 65+ are about 4 times those of young people. Once these expenditures increase, they're politically very difficult to reduce.
Third, vulnerability as a non-reserve currency country grows. Countries like South Korea that use non-reserve currencies suffer greater damage during crises when debt is high. For example, during the 2008 global financial crisis, South Korea experienced soaring exchange rates and a foreign currency liquidity crisis. At that time, Korea barely overcame the crisis by signing a currency swap agreement with the US Federal Reserve. If a similar crisis comes while the debt ratio is high, it becomes harder for the government to stimulate the economy with fiscal expansion. There's also risk of credit rating downgrades and surging government bond interest rates.
Ultimately, if debt growth speed isn't slowed, future generations' options will be severely limited and crisis response capacity will weaken.
✅ IMF's Fiscal Reform Recommendations
Let's examine the specific content and meaning of the fiscal reforms the IMF recommended to South Korea.
First, introduction of medium-term fiscal rules. The IMF emphasized that South Korea must legislate clear fiscal rules. Fiscal rules mean pre-determining how much debt the government can increase each year and what level of fiscal deficit is allowed. The European Union operates rules limiting fiscal deficits to 3% of GDP or less and government debt to 60% or less (though not all countries follow them perfectly). South Korea also has fiscal rule provisions in its National Finance Act, but with no specific numbers or implementation timeline, they lack effectiveness. With rules in place, politicians facing elections find it harder to recklessly expand fiscal spending to win votes.
Second, revenue base expansion is needed. South Korea's tax burden ratio (tax as percentage of GDP) is lower than the OECD average. Particularly, the VAT rate is 10%, lower than European countries (mostly around 20%), and the income tax base is narrow. The IMF recommended increasing tax rates or broadening the tax base to increase revenue. Of course, tax increases are politically sensitive and not easy. But as welfare spending continues to grow without revenue support, debt can only keep increasing.
Third, spending restructuring and efficiency improvements are needed. Simply collecting more taxes isn't enough. Unnecessary spending must be cut and money must be spent efficiently where truly needed. For example, overlapping welfare programs should be consolidated, and ineffective programs should be boldly eliminated. Pension reform is also an unavoidable task. The current National Pension system is unsustainable as people receive much more than they contribute. Reforms like raising premium rates or adjusting benefit levels are needed, but these also face strong political resistance.
The IMF's recommendations ultimately say "increase revenue, reduce spending, and reform systems" - difficult but unavoidable tasks.
✅ International Comparisons and Lessons
Let's find lessons South Korea can learn from other countries' cases.
First, countries that maintained fiscal rules well weathered crises successfully. Germany enshrined a "Debt Brake" fiscal rule in its constitution in 2009. It limits the federal government's structural fiscal deficit to 0.35% of GDP or less. Thanks to this, Germany maintained sound finances during the European fiscal crisis and had room to actively expand fiscal policy during COVID-19. In contrast, countries like Greece and Italy had loose fiscal discipline, accumulated excessive debt, and suffered greatly during crises.
Second, faster aging responses are more advantageous. Japan's aging began in the 1990s but by delaying reforms, its debt ratio exceeded 250% of GDP, the world's highest. Of course, Japan is a reserve currency country (yen is a semi-reserve currency) with high domestic savings, so it avoided major crisis, but with almost no fiscal capacity left, implementing new policies is difficult. In contrast, Sweden conducted bold pension and welfare reforms after its 1990s fiscal crisis, building a sustainable system. For South Korea too, now before aging becomes severe is the right time for reform.
Third, non-reserve currency countries must manage more conservatively. Countries with similar economic size to South Korea like Australia and Canada try to keep debt ratios low. These countries also know well that as non-reserve currency countries, they're vulnerable to foreign exchange market shocks during crises. Australia keeps its debt ratio below 40% of GDP, and Canada also maintains federal government debt in the 30% range of GDP. South Korea also needs more conservative fiscal management considering the constraint of being a non-reserve currency country.
Ultimately, South Korea must move in three directions: introducing fiscal rules, early aging response, and conservative debt management.
4️⃣ Conclusion
The IMF's fiscal monitoring clearly raises warning flags for South Korea's fiscal soundness. Not only is the debt ratio itself the highest among non-reserve currency advanced nations, but the bigger problem is that the growth speed is twice the advanced country average.
South Korea's current general government debt (D2) at 53.4% of GDP might still seem manageable. But it's projected to reach 64.3% by 2030, and without changing the trend, it will continue rising. Especially since South Korea has the structural vulnerability of being a non-reserve currency country, if the debt ratio increases, there's risk of a "double punch" of simultaneously surging exchange rates and interest rates during crises.
The biggest reason debt is growing rapidly is aging. Welfare spending on pensions, healthcare, and nursing care automatically increases as the elderly population grows. At the same time, the working-age population shrinks, meaning fewer people to pay taxes. Moreover, interest burden is growing with recent global interest rate normalization. When interest rates exceed growth rates (r > g), debt snowballs.
The IMF recommended three core reforms to South Korea. First, legislate medium-term fiscal rules to manage government debt and fiscal deficits below certain levels. Second, expand the revenue base. Tax increases are politically difficult, but without revenue support as welfare spending continues growing, only debt accumulates. Third, spending restructuring is needed. Unnecessary programs must be reduced and structural challenges like pension reform must be resolved.
Looking at other countries' cases, countries like Germany that maintained fiscal rules well weathered crises, while countries like Japan that delayed reforms saw debt explode. South Korea isn't too late yet. Now, before aging becomes severe, is the right time for reform.
From individuals' and businesses' perspectives, this fiscal situation must be monitored. If government debt grows, it will likely eventually lead to tax increases or welfare reductions. Also, fiscal deterioration in non-reserve currency countries can lead to increased exchange rate volatility, requiring risk management for businesses with high import ratios or individuals with foreign currency debt.
Ultimately, South Korea must pursue three tasks in a balanced way starting now: introducing fiscal rules, expanding revenue, and restructuring spending. This is a choice to leave sustainable finances to future generations even if it slightly increases the current generation's burden.
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