Korea’s Financial Debts Reach W2,500 Tril.

By Lee Hyo-sik

Staff Reporter

A debt crisis is looming large for Korea, with individuals, companies and government owing nearly 2,500 trillion (2.5 quadrillion) won, 2.3 times the nation's gross domestic product (GDP).

With the central bank widely expected to introduce a rate hike in the near future, the interest payment burden will increase sharply, making it more difficult for households and businesses to meet payment obligations and thus posing a threat to the domestic financial sector.

According to data compiled by the Ministry of Strategy and Finance, and the Bank of Korea (BOK) Sunday, outstanding financial debts of individuals, corporations and government reached 2,447 trillion won as of the end of December last year, more than two times Korea's 2009 GDP of 1,063 trillion won, and up more than 1,000 trillion won from the 1,438.5 trillion won recorded in 2004.

The financial liabilities of the three main agents of economic activity have been heading upward at a fast pace over the past five years, with individuals borrowing heavily from banks to purchase homes and other property.

The corporate sector has also been taking out record amounts of loans from creditors to expand business, with the government outspending its earnings to expand social welfare programs amid the rapid aging of the population and falling birthrates, and to prop up the sagging economy in the aftermath of the global financial crisis in late 2008.

Households owed banks and other financial lenders a total of 854.8 trillion won last year, up 57.3 percent from 543.3 trillion won five years ago. From 2004 through 2006, many families went on a borrowing spree to capitalize on the booming housing market, pushing up household debts sharply.

But the real estate boom came to an end in early 2007 and the property market has since remained sluggish, particularly after Korea was hit hard by the unprecedented worldwide economic downturn in late 2008.

With the sluggish housing market expected to continue for some time, coupled with the imminent interest rate hike by the central bank, household finances will likely deteriorate further down the road, as they have to pay larger interest on mortgages amid falling property prices.

The corporate sector also saw its debts jump 78.2 percent to 1,233 trillion won over the five-year period. Liability of public firms totaled 112 trillion won, up 108.2 percent from 2004, while private businesses owed a combined 428.8 trillion won, up 73 percent.

The outstanding debts of Korea's 23 largest state firms totaled 213.2 trillion won in 2009, sharply up 20.4 percent from 177.1 trillion won a year earlier. Housing and real estate-related enterprises were hit hard by the sluggish property market and had to borrow more money than ever to finance operating expenses. Transportation firms also saw their debts increase as they needed to finance infrastructure development projects on behalf of the government.

But private sector finance has been in relatively better shape as companies underwent drastic restructuring over the past decade, following the 1997-98 Asian financial crisis. According to the central bank, the average debt-to-equity ratio of listed firms here stood at 100.8 percent last year, down from 108.9 percent in 2008.

The government - both central and local - saw its debt grow by 77.1 percent to 359.6 trillion won in 2009 from 2004. The nation's debt-to-GDP ratio stood at 33.8 percent last year, much lower than the G-20 average of 75.1 percent.

But it has been increasing at a fast pace and is projected to continue to head upward for the foreseeable future because Korea has to spend more to boost its social safety net and other welfare-related programs.