Debt level worries analysts

As the world sits for a possible Federal Reserve announcement that U.S. interest rates will rise for the first time since 2006, household debt in Korea is still rising - to levels that some economists here see as unsustainable.

Korea’s own low-interest-rate policies have fueled an active real estate market but have also encouraged households to borrow rather than save. Rising U.S. rates will probably trigger rate increases here as well, but Moody’s says Korea can handle the debt because it is concentrated among high-income households.

According to the Financial Supervisory Service (FSS), household debt owed to banks declined 10.5 trillion won ($9 billion) during June to a cumulative 526 trillion won. But that figure does not include new mortgages that the banks issued and then sold to the Korea Housing Corporation to be assembled into mortgage-backed securities. If that borrowing is included, the debt burden on Korean households was 8.2 trillion won more than in May, a bigger increase than the 7.4 trillion won increase during April.

The new securities issued last month were valued at 18.7 trillion won. Most of the increase was contributed by mortgages, which added 6.9 trillion won from May to an accumulated figure of 438.9 trillion won. However when excluding mortgage-backed securities, mortgages declined by 11.8 trillion won.

Total loans, including those borrowed by businesses in June, amounted to 1,289.7 trillion won, a 0.7 percent drop, or an 8.5 trillion won decline, from the previous month. But after adding mortgage-backed securities, last month total borrowing from banks grew by 10.2 trillion won.

Corporate loans saw slower growth last month, adding 2.2 trillion won, a drop from 3.7 trillion won of additional loans in May. Total corporate loans stand at 733 trillion won. Borrowing from conglomerates declined for the second consecutive month. Loans to conglomerates were 2.1 trillion won less than in May, at 179.4 trillion won. Borrowing from small and midsize companies grew 4.4 trillion won to a total figure of 553.6 trillion won.

The growing household debt report comes at a time when concerns over the impact that oversized household debt might have on the economy has been building up. The financial authorities recently announced a stricter evaluation measure for new loans in hopes of curbing the ever-growing household debt. Including unsecured loans and credit card purchases, the total size of household debts amounted to a record 1,099 trillion won at the end of March. Already the market is estimating that household credit has already exceeded 1,100 trillion won as the policy rate cut that started in the second half of last year to a record low of 1.5 trillion won has encouraged buyers to take out loans.

“Korea’s households have increased their borrowing over the past decade and have debt levels similar to some of the most indebted advanced economies at around 73 percent of GDP as of the end of 2014,” Moody’s said. “Moody’s does not view the high levels of household debt as posing a systemic risk, given that most debt is held by high-income households, whose financial assets are worth more than double their liabilities.”

The report, however, noted that the debt will likely put downward pressure on consumption, which will affect Korea’s GDP growth amid already weak domestic demand.

“Weak external demand with slower global growth, combined with dampened domestic demand in the second quarter as a result of the recent outbreak of the Middle East respiratory syndrome (MERS), has lead Moody’s to lower its forecast for real GDP growth to 2.7 percent this year and 3 percent in 2016,” the report added.

Such downward growth projections are raising the possibility of another rate cut by the Bank of Korea, which could go against the government’s efforts to curb borrowing from financial companies.

In fact, the interest rate has been below 4 percent since 2014, and in June it dipped again slightly to 3.22 percent. That is, however, somewhat higher than the record low of 2.96 percent in April.

Some market workers are already predicting a major financial crisis in 2016, especially when the Fed starts normalizing dollar interest rates, which could also force the BOK to make a similar move next year.

But the number of non-performing loans is decreasing. The overdue payment rate was 1.5 percent, which is a drop from 1.6 percent in May. Overdue loans at the end of June stood at 7.9 trillion won, a drop from 10.4 trillion won the previous month. New overdue loans in June amounted to 300 billion won, a drop from 400 billion won in May.

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