Debt Diet Failed Korean Economy
Including the rental deposit, it exceeds 3,000 trillion won.
Loan size per young person increased by 27%
When an individual goes bankrupt, even banking companies are shaken.
Financial authorities “Manage GDP level at 80%”
Corporate debt also increased by 64% in 5 years
▲ Debt ratio change page 16 The three major players in the Korean economy – households, businesses, and the government – are all struggling in a swamp of debt. Although the reasons for each person taking on debt are different, both government and private debt are negative news with little difference in that they are perceived as time bombs that harm the soundness of the economy. As the three major economic entities simultaneously bear ‘debt risk,’ concerns are growing that the ability of other economic entities to defend themselves will inevitably decrease when financial instability occurs on one side. The decreased room for securing growth momentum in terms of government, businesses, and households (consumption) is also assessed as a new threat to the Korean economy.
Korea’s household debt to gross domestic product (GDP) ratio, as specified by the International Monetary Fund (IMF) in its ‘World Debt Database’ on the 3rd, is 108.1%, ranking second in the world after Switzerland (130.6%). Considering that last year’s nominal GDP was 2,161.7739 trillion won, if we invert it according to the IMF’s household debt ratio, the household debt is calculated to be about 2336.8775 trillion won. As of the same year, each person is carrying a debt burden of about 45 million won. If we add about KRW 850 trillion (as of 2020) of lease deposits, which are not recorded in statistics because they are not debts of financial institutions, the scale of household debt can actually be seen as exceeding KRW 3,000 trillion.
Over the past five years, Korea’s household debt has increased by 16.2 percentage points, the highest among 26 countries that have compiled related statistics. During the COVID-19 outbreak, the enthusiasm of asset markets such as real estate, stocks, and virtual currency is considered to be the main factor that increased household debt. In particular, during this period, ‘loan debt group’ and ‘stock debt group’ were mass produced mainly among people in their 20s and 30s with poor repayment ability. However, this was a global phenomenon that occurred simultaneously not only in Korea but also in major countries.
The problem is that after the COVID-19 period, while countries around the world achieved a certain level of success by implementing policies to reduce household debt, only Korea failed to go on a ‘debt diet’ in the household sector. Even this year, when households should have started ‘debt management’ in line with the period of rising interest rates, the authorities instead operated ‘special mortgage loan’, a housing mortgage loan product that lifted regulations on total debt service ratio (DSR), for a limited time. As of the end of August, the effective application amount for special home loans was 35.4 trillion won. It is known that a large number of young people in their 30s or younger have used this loan to purchase new homes. In this trend, the size of loans per person for young people in their 30s or younger has increased by 27.4% in four years from 62 million won in 2019 to 79 million won this year.
The burden of household debt leads to a decline in consumption, and when consumption declines, economic vitality decreases. Additionally, when an individual reaches a point where he or she is unable to repay the loan principal and interest, it has a chain reaction to the financial and corporate sectors. Because of this scenario, household debt that exceeds the management threshold is viewed as a detonator that will collapse the national economy. Experts believe that the threshold at which household debt begins to have a negative impact on economic growth is around 80%. Last year, Korea exceeded this by more than 20 percentage points. Accordingly, at the end of last month, the financial authorities announced, “We will mobilize all of our policy capabilities to reduce the (household) debt to GDP ratio to 80%.”
However, in addition to debt, the authorities must also pay attention to other negative factors such as growth and prices. This is why some predict that it will be difficult to find a suitable way to make a soft landing on the growing household debt risk. Due to the deterioration of the company’s management performance, the corporate debt ratio reached 173.6% last year, and an emergency light has been turned on for food and oil price management in the second half of the year. According to the Bank of Korea, the balance of corporate loans from financial institutions was 1842.8 trillion won as of the end of the second quarter, an increase of 129.7 trillion won (7.57%) from 1713.1 trillion won last year. Compared to 1,121.3 trillion won at the end of 2018, it increased rapidly by 64.3% in 5 years.
In addition, particularly vulnerable industrial sectors are suddenly appearing, such as growing concerns about the insolvency of real estate project financing (PF) bonds held by construction companies due to the prolonged real estate market recession. The balance of real estate PF loans at the end of the first half of this year was KRW 133.1 trillion, up KRW 1.5 trillion from KRW 131.6 trillion in the first quarter. The delinquency rate was 2.17% as of the end of June, and has been steadily rising since 0.55% in 2020. While the private sector is threatened by debt, government debt is also increasing, raising doubts about the government’s ability to handle the situation.
Sejong Reporter Lee Young-jun
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