Debt level swells to a high
In a report by the Bank of Korea on Tuesday, Korea’s private credit to GDP ratio was 197.8 percent. The rate was 194.4 percent a year ago.
The household debt-to-disposable income ratio was 151.1%, increasing 7.4 percentage points since year-end 2015.
Especially, loans with high interest rates borrowed by low-income families and self-employed men are on the rise. Borrowers who juggle multiple kinds of debt from at least three financiers with their credit ratings at the bottom of 30 percent accounted for 8 percent of all borrowers as of the third quarter. The size of credit taken from this financially vulnerable group stood at 78.6 trillion won.
“Low-credit borrowers with multiple debt instruments often resort to non-bank institutions that charges floating rates instead of the banking units,” said Shin Ho-soon, director of the financial stability department at the Bank of Korea.
“A rising interest rate will jeopardize those marginalized groups as it can raise the amount of repayment and hurt soundness in lending.”
Adjustable rate loans accounted for 71.6 percent of the country’s household debt in the third quarter, comprising 62.4 percent of mortgages.
The U.S. Fed’s move toward rate increases will likely translate into further increasing debt burdens, leaving the Bank of Korea with fewer options to move its key rate. On the one hand, the Bank of Korea may need to raise rates in line with the U.S. Fed to prevent capital from fleeing Korea to the United States. On the other hand, the central bank also needs to prop up a domestic economy that has seen growth stay below 1 percent for four consecutive quarters, which could be accomplished through an additional rate cut.
As for the corporate credit sector, things appear to be in better shape.
“The pace of increase in corporate credit has slowed, due to factors such as the continuing slumps in business conditions and credit concerns as a result of the ongoing restructuring,” the report noted.
The paper, dubbed a financial stability report, is sent to the National Assembly twice a year.
The report also noted a growing decoupling trend between the real economy and financial side of the economy.
The cycle of real and financial economy has growingly diverged after the global financial crisis in 2008-09.
The concordance index between the two sides of the economy stood at 0.69 before the financial meltdown but reduced to 0.23 after the crisis. The index measures the similarity in the pattern.
“Before the financial crisis, the trends of the two factors moved in a similar fashion,” the report said, “But after the crisis, the two cycles moved in an opposite manner.”
The reason, the report noted, is that the government’s stimulus measures often failed to achieve the proclaimed goal of boosting the economy.
The measures aimed at bolstering the real-estate market and rate cuts often ended up pushing up mortgages and household debts.
BY PARK EUN-JEE [firstname.lastname@example.org]