U.S. credit downgrade should serve as a warning for Korea

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U.S. credit downgrade should serve as a warning for Korea

Published: 19 May. 2025, 00:00

Audio report: written by reporters, read by AI

Signage is seen outside the Moody's Corporation headquarters in Manhattan, New York. [REUTERS/YONHAP]

On May 16, international credit rating agency Moody’s downgraded the United States’ sovereign credit rating from the top-tier “Aaa” to “Aa1.” This marks the third major agency to strip the U.S. of its highest rating, following Standard & Poor’s in 2011 and Fitch in 2023. Moody’s cited persistent fiscal deficits over the past decade, a sharp increase in federal debt and spending, and the likelihood of further deterioration due to Republican-led tax cut proposals. The agency also highlighted the growing burden of interest payments, with U.S. national debt now reaching 123 percent of GDP.

The downgrade is not a distant concern. Falling U.S. Treasury bond values and a weakened dollar could ripple through global financial markets. There is growing unease that the “Sell USA” trend — previously easing amid de-escalated tariff disputes — may resurface. President Donald Trump’s tariff and tax policies could also come under renewed pressure. Korea must monitor these developments closely.

The U.S. downgrade carries important lessons for Korea, especially as fiscal conditions worsen. Since the onset of the Covid-19 pandemic in 2020, Korea has posted annual deficits nearing 100 trillion won ($71.3 billion). This year, the government recorded a 61.3 trillion won deficit in just the first quarter. Over the past two years, tax shortfalls have amounted to 87.2 trillion won. Due to sluggish economic growth, Korea is unlikely to avoid another sizable deficit this year. As of the latest figures, national debt stands at 1,175.9 trillion won — an increase of 35 trillion won in just three months. According to the International Monetary Fund, Korea’s debt-to-GDP ratio will reach 54.5 percent in 2024, surpassing the average of 54.3 percent among non-reserve currency nations.

Despite this, presidential candidates continue to unveil pledges that would require significant fiscal outlays. Lee Jae-myung of the Democratic Party has proposed expanding child allowances — raising the eligible age from under 8 to under 18 and doubling the monthly benefit from 100,000 won to 200,000 won. He also supports revising the Grain Management Act and introducing a basic income for rural communities. Kim Moon-soo of the People Power Party has promised broad tax reductions, including expanded income tax deductions. These proposals could cost tens of trillions of won annually.

U.S. President Donald Trump holds the 2025 National Trade Estimate Report on Foreign Trade Barriers by the Office of the United States Trade Representative during an event to announce new tariffs at the White House on April 2 in Washington. [AP/YONHAP]

Both candidates have also pledged to include long-term care costs under national health insurance — a policy that alone would require 15 trillion won per year.

If these promises are carried out as stated, national debt will balloon, placing Korea’s credit rating at risk. In February, Fitch warned that “if Korea’s political environment results in increased debt, its credit rating could be downgraded.” A lowered credit rating would raise borrowing costs for both the government and private sector, further straining an economy already grappling with declining potential growth.

Korea’s next leader must resist the temptation of populist giveaways. Fiscal realism and long-term sustainability should take precedence over short-term voter appeal.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.