A ticking time bombHousehold debt reached 1,419 trillion won ($1.3 trillion) at the end of September. It surged by 31.2 trillion won from three months ago and 120 trillion won from a year ago. The pace of growth — tripling that of the gross domestic product — and the scale are both abnormal.
The 1,400-trillion-won load is astronomical. The local coffee industry generates a yearly revenue of 10 trillion won. The franchise industry, which feeds 1 million people a year, earns 100 trillion won. Korea’s full-year budget is scaled at 400 trillion won. It would need three year’s worth of state budget to afford repayment of household debt.
Financial institutions at home and abroad have warned of the risks from the rapid gains in Korean household debt. Debt increases beyond the economic growth pace could be potential bubbles. The previous government chose to turn a blind eye to the potential danger of inflating domestic demand through real estate. As a result, debt levels have built up to the extent of depressing the disposable income level and consumption.
There are signs of change in the long-held low interest and inflation environment around the globe. The United States continues to raise interest rates, and a hike is expected from the Bank of Korea this month. Runaway housing prices also show signs of correction. Higher interest rates and depreciation in asset value could hurt households and the financial system.
The government must shift its policy on household debt. With no efforts to deleverage the household debt that has been building up for over a decade in place, a ticking bomb is waiting to explode. It must prevent further rise and at the same time wisely mix policy to promote growth and distribution to help increase household income.
JoongAng Ilbo, Nov. 23, Page 30