Lee Jae-myung's currency comment raises eyebrows and questions

Democratic Party Lee Jae-myung, right, and People Power Party Yoon Suk-yeol at a studio in Mapo on Monday before the televised presidential candidate debate. [YONHAP]

The Democratic Party's candidate for president has stunned the nation by declaring that the won is close to becoming a key international currency.

Lee Jae-myung made the comment Monday during a televised debate.

He is being attacked not only for his inaccurate description of the won's position in the world financial markets, but also for his seeming lack of understanding of the economics behind the assertion.

It could be a damaging misstep, as he has staked his candidacy on his deft handling of economic matters as Seongnam mayor and Gyeonggi governor.

During the debate, he said Korea can afford to issue more debt because the won is already close to becoming a key currency globally. Internationalized currency can push their debt to a higher percent of GDP because the debt is more widely held by investors and traders.

"The household debt ratio in Korea is the highest in the world, whereas the national debt ratio is one of the lowest," Lee said. "In other countries, it exceeds 110 percent, but ours is less than 50 percent."

"That's because the country did not take the burden imposed on the people and instead passed it onto individuals."

Lee argues that international institutions such as the International Monetary Fund (IMF) recommend a national debt-to-GDP ratio of 85 percent. In 2021, Korea was at about 47 percent.

"Because we are currently so low, we have enough room," Lee said.

Lee's opponents have argued that Korea is not a key currency country. They say that while the won is considered a safe asset, issuing more bonds could lead to higher sovereign credit risk.

Yoon Suk-yeol, from the main opposition People Power Party, argues that a 50 to 60-percent ratio for a country without an internationalized currency is a problem.

"When issuing too much government debt, the nation's credit score falls and the interest on external debt will rise," he said, noting that when Sweden's ratio broke 40 percent, government bond rates increased.

Yoon argues that the drop in the credit rating could lead to an exodus of foreign capital, which could bring about chaos not only in the financial market but spill over into the real economy.

Ahn Cheol-soo, another candidate, said during the debate that the argument by Lee that Korea's debt ratio should be allowed to exceed 100 percent of the GDP only applies to key-currency countries.

"There are many problems if a country that is not a key-currency country issues government bonds as there is not much demand," Ahn said.

The DP released a statement during the debate that Lee's comment was based on a report by the Federation of Korean Industries (FKI). The lobby group said that the comments were based on a flawed interpretation of the report.

The FKI said that the report was about Korea having the potential to be included in the International Monetary Fund's Special Drawing Rights (SDR) basket, which currently has five currencies: the dollar, the euro, the renminbi, the yen and the pound.

It added that even if the Korean won is included in the SDR basket, this does not mean it would lead to surge in demand for Korean bonds.

The won doesn't even rank in the top 20 for global payments.

According to the Society for Worldwide Interbank Financial Telecommunications, nearly 40 percent of global payments are in dollars and 37 are denominated in euro.

The pound is 6.4 percent, renminbi 3.2 percent and the yen 2.79 percent.

Even Canadian, Australian, Hong Kong and Singaporean currencies are used for more payments than the won, which is used for 0.2 percent of global payments.

Chae Yi-bae, the joint head of the DP's fair market committee, argues that Lee's comment on the key currency was used to explain how Korea's economy is relatively strong and the country fiscally sound.

"It shows that they didn't know what a key currency is," he said of the critics.

Due to in part to aggressive spending under the Moon Jae-in government, the national debt is expected to break 1,000 trillion won and 50 percent of GDP for the first time by the end of this year. Last year it was 47.3 percent.

In November, the IMF estimated that the national debt ratio will reach 66.78 percent by the end of 2026. It projected that Korea's national debt ratio will grow at the fastest pace among 35 countries categorized as advanced economies.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]