Financial GAP’s

a. Government Financial GAP

In the last twent three years, South Korea has demonstraded a strict
control of its budget balance, always registering primary budget surplus.
Moreover, in 2016, it reached the third highest primary surplus of the analysed
series. For the period, the korean primary budget balance varies between 203
billions at current prices, in 2009, and 28.652 billions at current prices, in 2016,
with an avarege of 14.203 billions. In terms of percentage of GDP, the avarege
is 1,6% for the twenty three years with the maximum 4,2% in 2000.
As presented by the chart XX, the korean primary budget balance
regularly oscillates over time in accordance with economic activity, since tax
revenues and government expenses are correlated with GPD growth rate. It
may occours because of:

Government expenditures, such as those for unemployment insurance and public

assistance to the needy, increase when unemployment rates go up. Tax revenues
automatically increase with increases in employment and GDP. Corporate income tax
collections are particularly sensitive to fluctuations in economic activity. Personal
income tax collections based on a progressive rate structure also fluctuate with the level
of economic activity. (HYMAN, 2010, p. 493).

The korean tax revenue and government expenses demonstrate this

behaviour. From the chart XX, it can be observed that tax revenue and
government expense growth are alligned to GDP growth over time.
Even though the primary budget balance has been positive over time, it
can be observed from chart xx that the budget balance after insterest payment
has not been following this tendency. As conquence of growing debt level, the
payment of interest is increasing leading a budget balance deficits after interest
payment.
Based on this analysis is possible to conclude that South Korea has been
making effort to register primary budget balance surpluses. However, the
growing interest payment is generating budget balance deficits after interest

© The ESADE MBA 2023 1|Page

payment. It might create financial troubles ahead to pay government obligations
in case of growing government debt.

b. Country Financial GAP

The Current Account Balance of South Korea presents two important

patterns over time. In the first period, between 1995 and 2008, the average
current account was 7.7 billion of U.S. dollar and in the second period, between
2009 and 2017, the average current account was 64.7 billion of U.S. dollar. This
significant pattern change are led by the international trade policy of the
country.
In recent years, the “traditional strategy of encouraging export-led growth
based on manufactures” (World Trade Organization, 2016, p. 22) has increased
korean exports, and consequently it has generated continuous balance of
payments surpluses.
From the perspective of South Korea, it can be observed from the chart
XX that public and private sector has contributed to geneterate surpluses and
become South Korea in a tradional lender. However, from 2012, the private
sector has been a important contributor to the South Korea financial GAP
because of the successful export policy.
These balance of payment surpluses make South Korea a traditional
lender to rest of the world and it do not present possible future dificulties in
order to pay off foreign obligations.
 Primary Budget Balance of the South Korea
35,000 4.5%
30,000 4.0%
3.5%
25,000
3.0%
billion of Won

20,000 2.5%
15,000 2.0%
1.5%
10,000
1.0%
5,000 0.5%
0 0.0%
95 97 99 01 03 05 07 09 11 13 15 17
19 19 19 20 20 20 20 20 20 20 20 20

Budget Balance (Current Prices) Budget Balance (% of GDP)

Budget Balance after Interest Payment of the South

Korea
40,000 6.0%
30,000 5.0%
4.0%
billion of Won

20,000 3.0%
10,000 2.0%
1.0%
0 0.0%
(10,000) -1.0%
95 97 99 01 03 05 07 09 11 13 15 17
19 19 19 20 20 20 20 20 20 20 20 20

Budget Balance (Current Prices) Budget Balance (% of GDP)

Government Debt
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
95 9 96 997 998 9 99 0 00 0 01 0 02 003 004 0 05 0 06 007 008 009 0 10 0 11 012 013 0 14 0 15 0 16 0 17
19 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Government Debt (% of GDP)

 Balance of Payment of the South Korea
120.0 12.0%
105.0 10.0%
90.0 8.0%
billion of U.S dollar

75.0 6.0%
60.0 4.0%
45.0
2.0%
30.0
0.0%
15.0
0.0 -2.0%
-15.0 -4.0%
-30.0 -6.0%
95 97 99 01 03 05 07 09 11 13 15 17
19 19 19 20 20 20 20 20 20 20 20 20

CA Balance CA Balance (% of GDP)

Country Financial GAP

12.0% 12.0%
10.0%
8.0% 8.0%
6.0%
4.0%
4.0%
2.0%
0.0%
0.0%
-4.0% -2.0%
-4.0%
-8.0% -6.0%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
19 19 1 9 19 19 2 0 2 0 20 20 2 0 20 20 2 0 20 20 20 2 0 20 20 2 0 20 20 2 0

Private Financial GAP (% of GDP) Government Financial GAP (% of GDP)

CA Balance (% of GDP)
HYMAN, David N. (2011). Public Finance: A contemporary application of theory
to policy. United States: Cengage.

WORLD TRADE ORGANIZATION (2016). Trade Policy Review. Retrieved from

https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?
language=E&CatalogueIdList=233681,230984,94925,89233,66927,84639,3618
0,47931,35204,11844&CurrentCatalogueIdIndex=1&FullTextHash=&HasEnglis
hRecord=True&HasFrenchRecord=True&HasSpanishRecord=True