SEOUL, Dec 11: South Korea on Wednesday announced a set of measures to reduce debt levels at key state-controlled firms, the latest effort by President Park Geun-hye’s administration to ensure fiscal soundness.
The Ministry of Strategy and Finance said in a statement it plans to reduce the debt-to-capital ratios of 41 key public firms to around 200 percent in 2017, the last full year for the Park administration’s five-year term, from 221 percent in 2012.
Data provided by the finance ministry shows that total debt at the 41 firms, which account for nearly all of the public companies’ debt, ballooned to 473 trillion Korean won ($449 billion) last year from 274 trillion won in 2008, when the debt-to-capital ratio stood at 137 percent.
The new directives address mounting debt levels at public firms, such as state utility Korea Electric Power Corp. (Kepco) and unlisted state public housing construction firm Korea Land & Housing Corp, in a bid to ensure that the government’s fiscal health is not jeopardized.
The firms will be instructed to slash incentive payments for senior executives and reduce benefits for workers in cases where more than the market norm is offered. The firms will also be ordered to re-examine all existing projects to eliminate unnecessary expenditure and tie any new spending to expected future income.
A committee of government officials and private sector experts will also be established to monitor and advise the government on the debt reduction progress.
A significant portion of the debt growth at public companies stems from growth-supportive public sector spending in the wake of the global financial crisis. The government also delayed increases in utility tariffs to insulate households and local manufacturers from the rising costs of oil and gas globally, which put further pressure on the balance sheets of utility companies.
Credit rating agency Moody’s Investors Service has cited the rapid public debt growth as a risk factor to South Korea’s sovereign rating of Aa3. Seoul will be keen to steer clear of and a ratings downgrade.
The Park administration has pledged to keep government spending growth below the government’s projected income in coming years to ensure fiscal soundness is not compromised. It also signed off on the second electricity price hike of 2013 in November, which will help reduce losses for Kepco.
Fiscal challenges have already seen the abrogation of key pledges by the Park administration. The government was forced earlier this year to give up its initial aim of balancing the budget by the end of its five-year term, in part due to a projected tax revenue shortfall of up to 8 trillion won.
Park also issued a public apology after scaling back a monthly subsidy programme for the elderly — another casualty of the government’s financial constraints.
($1 = 1053.0000 Korean won)
(AGENCIES)
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