By Kim Tong-hyung
Korea is headed for further economic turmoil as family finances collapse under the burden of record debt, rising interest rates and soaring inflation.
Less than six years after surpassing 500 trillion won, the mountain of debt amassed by Korean households reached a new high of 801.4 trillion won (about $733 billion), rising by 6 trillion won in the first quarter of this year, the Bank of Korea (BOK) said Wednesday.
The central bank’s figures represent borrowing from financial institutions such as banks, mutual savings banks, credit card companies and state housing finance agencies. When combined with unsecured loans, the country’s household debt is believed to be around 1,000 trillion won, matching an entire year’s gross domestic product (GDP).
There are concerns that the historically high level of household debt may pose considerable challenges to the country’s financial stability. The country’s household lending as measured by the ratio of debt to disposable income was 157 percent in 2010, ranked among the world’s highest along with nations like Britain and Australia.
Debt expanded at a slower pace in the January-March period than the previous quarter when it grew by 25.3 trillion won, according to BOK data, as winter is traditionally a slow season for housing transactions.
The BOK report came hours after the Korea Center for International Finance cited a recent analysis by Moody’s warning that the country’s swollen household debt looms as a serious risk to its banking sector.
“Seasonal factors were in play as housing transactions declined comparatively during the first quarter, which reduced the amount of housing loans. And with companies dishing out year-end bonuses, fewer people were overdrawn,” said Lee Jae-gi at the BOK’s financial statistics team.
“Credit purchases were also down during the first quarter and inflation appears to be suppressing consumption,” he added.
The Korean borrowing binge has been driven by speculative property demand over the past decade, with low interest rates encouraging people to splurge on houses in the blind faith that their value will increase forever. Now, with the sluggish economy letting the air out of the housing bubble, millions of homeowners find themselves trapped in negative equity.
Earnings continue to lag consumer price inflation, which has been at least a point above the government’s 3 percent target for every month this year, and the employment market has been slow as well. Officials fear that the effect of future interest rate rises, which look inevitable due to the growing inflation, could cripple the credit-crunched households.
Household debt is making this an extremely difficult time for monetary policy. Households struggling to repay their debts explain a significant part of the trigger-shyness shown by BOK’s rate-setters in the face of soaring inflation. However, some critics say such reluctance will actually make things worse by sustaining expectations for low borrowing costs, which may influence families to take on even more debt.
The BOK kept the key rate on hold at 3 percent for the second straight month in May citing economic uncertainties.
Adjusted for inflation, Korean families saw their average monthly income drop 0.9 percent during the January-March period on an annualized basis, the second-consecutive quarter that the real income declined year-on-year, Statistics Korea said last week.
The average household was spending more on basic expenses such as gas, food and health insurance, although the slow economy appears to have strapped their budget for leisure and education.
In nominal terms, the average monthly income of Korean families rose 3.5 percent year-on-year to 3.85 million won (about $3,545) during the first quarter, marking an increase for the sixth consecutive quarter, while their expenses were up 4.7 percent at 3.17 million won.