South Korea

The pandemic marked a turning point in the country’s fiscal policy as it shifted from a rather conservative stance to an expansionary one, owing to a public investment initiative in response to the pandemic. Following a quarter of a century of positive budget balances, South Korea has registered annual fiscal deficits since 2020, albeit comparatively small ones (around -1% of GDP on average). Narrow fiscal deficits are expected to remain the norm in the coming years as the government invests in research and development, while pressures from growing pensions and healthcare requirements for the aging population increase. The budget plans are to reduce the fiscal deficit to -0.6% of GDP in 2023. However, despite greater export expectations from 2024 on, this target could prove unattainable. South Korea’s public debt rose from 42% of GDP in 2019 to an estimated 57% in mid-2023 but is forecast to remain below 60% in the next few years, a still favorable ratio compared to the OECD average that is approaching 100%.  

That said, the real issue in South Korea is household debt, which amounted to 108% of GDP in 2021, mainly in the form of mortgages. Aging is a structural threat to the South Korean economy: With the world’s lowest fertility rate – 0.81 children per woman in 2021 – the median age of the population is rapidly rising, reaching 44.5 years in 2023, adding pressure on pensions and setting the stage for harsh labor reforms.

South Korea’s external position is favorable in the short term but the economy may face some medium-term challenges. The current account balance has posted continued annual surpluses since 1998, even during the Great Financial Crisis and the Covid-19 crisis. It dropped to +1.8% of GDP in 2022 due to rising energy import prices but is expected to recover to over +2% of GDP in 2023-2025. Despite troubles in the semiconductors and electronics sectors, South Korea enjoys new and growing economic drivers, such as tourism and creative industries. Still, exports are mainly concentrated in the electronics sectors, and China (25.3% of exports in 2021) and the US (14.9% of exports in 2021) remain its dominant destinations. In a context of growing geopolitical tensions, this jeopardizes the medium-term stability of the country’s exports.

South Korea’s gross external debt is comparatively low at less than 40% of GDP and that ratio is expected to decline in the next years. Moreover, the country is a net external creditor.