IMF lowers growth rate for over 140 countries

The International Monetary Fund (IMF) released its first economic outlook report since the Ukraine situation on Tuesday. South Korea’s annual growth rate this year is expected to be 2.5 percent, which is 0.5 percentage points lower than the organization’s projection made three months ago, according to the report. South Korea is one of over 140 countries that the IMF lowered growth expectations. A series of negative factors, such as high inflation, currency deflation, and economic slowdown, are expected to continue as geopolitical crises are added while a large amount of money has been released to address the COVID-19 crisis.

The IMF pointed to damage to the supply chain, surging oil prices, and interest rate increases, as well as mounting debt in the private sector, as reasons to lower its growth expectations. Household and corporate debts significantly increased due to COVID-19’s negative impact on funds, which in turn will negatively affect the economy. Providing more finance to address the crisis would be futile with the damaged fundamentals in the private sector.

Some emerging countries are already at risk of national bankruptcy with increasing debts in both the private and public sectors. Sri Lanka already announced a temporary default while Pakistan, Egypt, Tunisia, and Lebanon are getting close to it. The IMF diagnosed that 41 of 73 low-income countries are already insolvent or at high risk for insolvency. If the debt crisis expands with a domino effect, no country is guaranteed to be safe.

In South Korea, there have been concerns about the risky level of private debts for a long time. As of the end of last year, the total amount of the country’s private debts recorded 4,540 trillion won, which is the highest figure in history. It is the result of soaring housing prices, excessing borrowing to invest in stocks, and increasing loans taken by self-business owners and small- and medium-sized companies. South Korea’s ratio of household debts to its GDP is the third highest in the world and its corporate debt is increasing at the seventh-highest pace in the world. If a series of household debts and corporate debts become insolvent, the South Korean economy will fall into a situation that nothing can remedy.

Interest rates need to be raised to manage household debts and inflation. However, raising interest rates alone cannot solve all problems. Currency deflation impacting the overall economy can reduce the total amount of debts, but it can make loans more difficult for low-income groups compared to high-income groups, which can lead to a series of bankruptcy for vulnerable people. Comprehensive measures to improve economic fundamentals in consideration of stabilizing won’s value, enhancing corporate competitiveness, and improving trade balance should be put forward while setting a key goal to allow a soft landing for debts.