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IMF Warning: Korea’s National Debt Growing Fastest Among Non-reserve Currency Countries

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IMF Warning: Korea’s National Debt Growing Fastest Among Non-reserve Currency Countries

An analysis by the International Monetary Fund (IMF) has revealed that South Korea’s government debt-to-gross domestic product (GDP) ratio will increase at the fastest pace among non-reserve currency countries worldwide over the next five years. This is attributed to rising mandatory expenditures due to population aging, combined with the government’s shift toward an expansionary fiscal stance that accelerates spending growth. Warnings emerge that excessively rapid government debt growth could lower national credibility, subsequently driving up government bond yields and market interest rates, which could dampen private investment and consumption.

According to the IMF on Dec. 21, South Korea’s government debt-to-GDP ratio (based on D2 criteria), currently at 53.4% this year, is projected to rise by 10.9 percentage points to 64.3% by 2030. This increase represents the largest among countries excluding reserve currency nations such as the United States (+18.4 percentage points) and France (+12.9 percentage points). The only countries above Korea are six nations including the United States, France, Belgium, Slovakia, Estonia, and Lithuania—all of which use reserve currencies like the dollar or euro. Even if debt increases rapidly and fiscal soundness deteriorates, these countries maintain relatively easy access to international financial markets for funding, providing them with a form of “safety net.” A foreign exchange market expert noted, “Fiscal soundness levels should be evaluated differently according to individual country circumstances,” adding, “Comparing Korea’s safety threshold with dollar and eurozone countries would be a grave misconception.”

South Korea’s increase in government debt-to-GDP ratio is at a concerning level. According to the IMF, the ratio will grow by 18.4 percentage points from 45.9% in 2020 to 64.3% in 2030, ranking third among the 37 countries compared by the IMF. Since first and second-place Singapore and Finland are either city-states or countries with small economies, Korea effectively has the largest increase among major economies.

The rapid growth in government debt ratio stems from GDP growth failing to keep pace with debt growth. According to the Ministry of Economy and Finance, as the government announces expansionary fiscal policy, annual national debt growth rates are projected to be 8.7% in 2026, followed by 8.3% in 2027, 8.6% in 2028, and approximately 7.5% in 2029. However, nominal GDP growth rates during this period will only reach 3-4% annually. With national debt growth rates exceeding nominal growth rates by more than 4 percentage points year after year, the deficit ratio continues to expand.

Rising government debt requires the government to allocate more budget for principal and interest payments, which can trigger increased government bond issuance volumes and lead to interest rate increases. Indeed, the United States, which has suffered from chronic fiscal deficits, is experiencing rising 30-year government bond yields. France, whose national credit rating was downgraded in September this year due to fiscal soundness concerns, has also seen its 30-year government bond yields rise by 0.3 percentage points over the past three months. In South Korea, with next year’s budget reaching a record 728 trillion won and plans to issue deficit bonds worth 110 trillion won, 30-year government bond yields have jumped by 0.8 percentage points over the past year.

Debt increases also affect exchange rates and inflation in the long term. Currency issuance may increase to reduce debt repayment burden, which can pressure inflation and won depreciation. Prof. Yeom Myeong-bae of Chungnam National University’s Department of Economics stated, “Surging government bond yields increase borrowing costs, affecting private companies’ financing and leading to reduced investment in both public and private sectors,” adding, “Moreover, increasing government bond issuance to inject money into the market expands money supply, which can drive up prices and result in won depreciation.”

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