Korean banks grapple with massive public sector debt

It’s now the country’s main risk.

A report from global credit rating firm Moody's identified the ballooning public sector debt as becoming one of main risks in South Korea. The sector, which played a key role as a booster to the economy after the 2008 global financial crisis, is now saddled with massive debts due to delays in hiking tariffs for electricity and gas. Analysts said the delay in hiking tariffs for electricity and gas was a quasi-fiscal stimulus measure. The delay protected households and companies from the effects of higher global oil and gas prices.

As a result, the public sector's non-financial corporate debts surged 46.4% from 2009 to 2012. The ratio of public corporations' liabilities to GDP increased from 31.6% in 2009 to 38.7% in 2012, exceeding the ratio of sovereign debts at 35% last year. Those quasi-fiscal stimulus activities resulted in two public companies, Korea Land and Housing and the Korea Electric Power Corporation, accounting for nearly half of the total debt at 47.3% , according to Moody’s. Korea Gas Corporation was the third largest public firm in terms of debt.

Despite their public policy role, debts in the public corporate sector increased faster than assets, leading to a fall in net assets. Liabilities jumped 46.4% between 2009 and 2012, greater than a 24.6% gain in assets.