Heavy household debt weighs on Park's economic team

President-elect Park Geun-hye has announced economic policy goals for the new government that focus on jobs, small- and mid-sized firms and fair competition, but many obstacles lie ahead.

More than anything else, the heavy household debt could dampen her efforts to revitalize the economy by boosting private consumption.

The jitters over growing household debt are now weighing heavily on the Korean economy as heavily-indebted families are exposed to greater risks of defaulting amid worsening economic conditions.

Household debt reached a record 937 trillion won ($876.9 billion) as of the end of September, tantamount to more than 70 percent of Korea’s gross domestic product (GDP).

The country’s household debt-to-GDP ratio reached 81 percent, exceeding the 73 percent OECD average.

Analysts say the credit problem could raise uncertainties for the economy this year. Policymakers are now debating whether the new government should rescue the defaulters or delinquents using taxpayers’ money.

Park’s economic team, led by Hyun Oh-seok, nominee for deputy prime minister for the economy, is expected to maintain a balance between economic growth and social welfare, to restore the middle class.

“I think we should carry out policies to boost our sluggish economy in the short term, while at the same time balancing economic growth and welfare over the long term,” he said during a news conference last week.

His remarks are in line with Park’s pledges to address welfare issues as well as boost the economy crippled by the global downturn, unemployment and the high levels of household debt.

Highly indebted households have been reluctant to spend, making matters worse for the export-driven Korean economy that has been buffeted by downturns in major trading partners such as China, the United States and Europe.

A prolonged housing slump and a subsequent drop in apartment prices have also spawned concerns that a large number of mortgage borrowers could default, saddling banks with bad loans. Park’s economic team is tasked to engineer a soft landing for the debt problem.

Another challenge is the worsening profitability at small- and mid-sized firms, at which almost 90 percent of Koreans are working.

On Thursday, the presidential transition team said the new government will ban fresh investment between affiliates of a conglomerate in order to protect small- and medium-sized enterprises (SMEs), while strengthening cross-ownership restrictions on industrial and financial companies.

Park’s aides say such policies are aimed at nurturing more value-added businesses and strengthening the country’s economic fundamentals.

Small firms have welcomed Park’s move to ensure fairer competition between conglomerates and SMEs, but are skeptical about the effects of such policies.

“President Lee Myung-bak also initiated various measures to help small firms, but many of them still remain uncared for,” said Korea Association of Industry, Academy and Research Institutes Chairman Kim Kwang-seon.

“About 99 percent of Korean firms are small-sized but they employee 88 percent of Koreans. That’s why they deserve more attention.”

Kim suggested that the government and banks create a system in which troubled firms can receive help when they really need it.

“It is meaningless to increase loans for SMEs because the barriers will still remain high for those in need,” he said.

One official from the Small and Medium Business Administration (SMBA) echoed Kim’s concerns.

“In the past, financial companies extended more loans to companies when the economy was good. However, they called them in when the economy worsened.

Their first target was always small firms,” an SMBA spokesman said. “Such a discriminative policy is really discouraging for small firms. We hope Park will address this issue.”

Financial regulators and banks have announced support programs for small companies to match Park’s corporate policy.

Most major lenders, including Kookmin, Woori, Shinhan and Standard Chartered, announced plans last month to increase loans for innovative and promising small firms while charging low interest rates.

Financial regulators are also preparing to expand support programs for small businesses. The Financial Services Commission recently called a meeting of executives from banks and state-run financing institutions to discuss measures to assist small companies.

For banks, however, more loans to small firms, whose financial health is not as stable as bigger ones, mean that there will be higher loan default rates.

“Bank will be in big trouble if things go wrong,” a bank official said, asking not to be named. “It’s a risky bet but we have no choice but to follow directives from regulators.”

Park’s resolve to take a harsher stance on inter-affiliate transactions by chaebol means she will create a fairer business environment.

Such a vision largely reflects concerns that the conservative government and ruling party have failed to embrace the working class because its image has mostly been associated with wealthy and powerful people, and big businesses.

Her economic policy goals show she is determined to change such a perception, Park’s aides say.

“After she takes the presidential oath on Monday, the government will create a policy roadmap that is focused on ensuring fair competition and equal opportunities for all classes of people,” an aide said.

“Through harsher measures against conglomerates, she wants to build a society in which the privileged few assume more responsibility and social obligations than the less privileged.”