South Korea’s ratio of household debt to gross domestic product has exceeded the average figure held by members of the Organisation for Economic Cooperation and Development.
According to the Korea Chamber of Commerce and Industry, Korea’s household debt-to-GDP ratio reached 81 per cent, surpassing 73 per cent of the OECD average.
The level is quite serious as it is similar to the ratio (85 per cent) of Spain which is suffering from a financial crisis and far exceeding that (61 per cent) of Greece, one of the few countries mired in the eurozone debt crisis.
Further, Korea ranked third in the pace of debt growth among OECD members with 9.8 per cent, following Greece (12.1 per cent) and Turkey (10.8 per cent).
The growth of household debt, which had gradually slowed since 2006, accelerated in 2010, climbing 2.4 percentage points from the previous year to 9.8 per cent in Korea.
Its GDP growth recorded 6.3 per cent during the same period, which means the nation’s household debt surged at a faster rate than GDP.
“The OECD specifically pointed to household debt as the main reason for its low forecasts of Korea’s economic growth (3.3 per cent) this year,” a KCCI spokesman said.
He said household debt could induce an economic crisis if the slowdown in the global economy persists and the recovery of Korea’s domestic economy is delayed.
Rising inflation is eating into households’ income growth and purchasing power, leading the nation’s domestic demand to grow at a sputtering pace.
The Korea Center for International Finance said the banking sector had gradually been recovering profitability and quality of assets since the global financial crisis. But according to the centre, the growth in household debt could serve as a risk factor.
The institution pointed to households’ growing burden of a higher interest rate on mortgage loans.
It also said about 30 to 40 per cent of mortgages were taken out for the purpose of investment or consumption rather than actual house purchases.
Financial regulators recently instructed banks to reduce their lending rate by setting guidelines and are to urge banks to stop evaluating branches based on their amount of household lending.
But economists say that a key issue is whether the nation would see a soft-landing in resolving the household debt woes.
“The household debt issue is certainly problematic. But it is undesirable for the authorities to lead more borrowers to secondary financial companies,” said Hyundai Economic Research Institute economist Park Deok-bae.
The Korea Herald, Publication Date : 15-06-2012