By Lee Joon-seung 2015/11/24
SEOUL/SEJONG, Nov. 24 (Yonhap) — Soaring household debt that could exceed 1,200 trillion won (US$1.03 trillion) by year’s end is becoming a serious liability to South Korea’s long-term economic well-being, local observers said Tuesday.
The alarm bells are going off as the Bank of Korea (BOK) announced earlier in the day that the country’s household credit hit an all-time high of 1,166.4 trillion won as of end-September. This is up 3 percent from 1,131.5 trillion won tallied three months earlier.
What is more worrisome is that the pace of credit growth in the third quarter. In the July-September period, money borrowed by households grew by 34.5 trillion won vis-a-vis the previous three month period. This is an acceleration from the previous record of 33.2 trillion won reported in the second quarter of this year.
“At this pace, there is a chance that the total will top the 1,200 trillion won mark as of end-December,” said a government official, who declined to be identified.
The recent rise in household debt comes as the central bank began lowering its key interest rates from last year, to cope with falling growth. The key rate stands at a record low 1.5 percent.
It also reflects measures taken by the government to prop up the local property market, and steady rise in local rent costs that forced many people to buy a home, instead of opting for a lease arrangement.
In August 2014, state policymakers eased rules governing debt-to-income (DTI) and loan-to-value (LTV) ratio that facilitated borrowing.
Market watchers said that the rise in household debt comes at a time when the U.S. Federal Reserve is widely expected to mark up it key policy rates next month, which can trigger an outflow of capital from emerging markets and fuel financial market volatility.
Domestic retail banks have been marking up interest rates slightly from September onwards in expectations that the BOK may eventually raise key rates, if the United States takes such a step, to prevent money from leaving the country.
A rise in rates can add more burdens to borrowers and low income earners, who will be forced to cut back on spending, especially if people borrowed money on floating rates.
Besides the overall rise in credit, local experts said a spike in loans taken out by secondary banks, like savings banks, shot up by 6.32 trillion won in the third quarter. This is the second largest quarterly increase since the second quarter of 2014.
Interest rates at savings banks are relatively high compared to regular banks and people who borrow money from these institutions generally have lower credit ratings.
More money taken out from these banks can burden borrowers and generally weigh down the economy in the long run.
In addition, data showed there has been a steady rise in borrowing by small-time, self-employed entrepreneurs who may not have the capability to pay back debt.
Reflecting on this, Lee Jun-hyup, a research fellow at Hyundai Research Institute (HRI), said of the 1,600 trillion won in debt, about 700 trillion may be money borrowed from self-employed people.
“As a rule, people spend money after they’ve covered their expenses, that includes interest paid to banks, so a rise in rates will lead to weakening on consumption,” the economist said.
This is a serious problem for Asia’s fourth-largest economy whose exports have contracted this year. In the first 10 months of 2015, South Korea’s cumulative exports reached $440.2 billion, down 7.6 percent from a year earlier,
On the positive side, the BOK has maintained that while household debt has been on the rise, so has income.
In its financial stability report published in June, the rate of disposable income to debt stood at 138.1 percent as of late March, an improvement from 135.4 percent tallied for September of last year.
In addition, the government and local lenders said that moves to curb borrowing, like getting people to pay back both interest and the principal, should restrict future spikes in debt.
“The government already asked lenders to tighten oversight on borrowing as of July with local banks putting the finishing touches on their own loan practice for implementation in 2016,” a finance ministry official said.
He said starting in January, it will become much harder for people to borrow money using homes as collateral.
Local banks have said that they will use new “stress tests” to more precisely determine if a person can handle excessive loans, and not issue loans if DTI levels exceed 80 percent.
The government, meanwhile, said that it is weighing various options on the table to deal with the debt problem, but made clear any further action will take into account the need to keep the current economic growth momentum alive and in particular, not cause serious problems for the real estate market.
Sung Tae-yoon, an economics professor at Yonsei University in Seoul, said government actions seem to be focused on maintaining the health of financial institutions.
“This approach, while a step in the right direction, is not enough and more must be done to push for economic and income growth,” he claimed.