Suffocating household debtHousehold debt was equivalent to 92.8 percent of South Korea’s gross domestic product last year, according to the Bank of Korea. That is sharply above not only major economies such as the United States (79.5 percent), but also above emerging economies like Malaysia and Thailand whose level hovered around 70 percent. Only seven countries, including Switzerland, Australia, Norway and Canada, showed higher shares. The pace of household debt growth accelerated to 4.7 percent last year from 1.5 percent in 2013.
International bodies recommend household debt levels of 75 to 85 percent of the respective GDP. If it exceeds this, the debt burden can slow growth. Consumer spending and domestic demand could be affected as household income would go more to finance debt. The Bank for International Settlements estimates that an increase of 1 percentage point in household debt could translate to a cut of 0.1 percent in the GDP growth rate.
Korea’s household debt reached 1,346 trillion won ($1.19 trillion) at the end of March. When we include loans to self-employed individuals, who are categorized as corporate borrowers, the share would have already exceeded the GDP scale. The risk has become higher as loans are increasingly taken out of the non-banking sector due to a tightened cap on bank loans. A crisis could be in the making as household debt against the GDP was 86.1 percent in the United States when the subprime mortgage risk blew over in 2008.
It is not easy to reduce debt. Authorities must come up with subtle surgical methods of removing the flashpoints while keeping the debt load under a manageable growth rate. The recent multiple actions to stabilize the real estate market would dampen demand for home-related loans. But there is the risk of the demand stretching to land, office buildings and credit loans.
Debt is debt. The Korean economy is sinking under the astronomical household debt pile. Household debt must come under control in order for President Moon Jae-in achieve his promise to reduce polarization in wealth and increase income for growth.
JoongAng Ilbo, Aug. 8, Page 30