Debt in private sector doubles of GDP
By Nam Hyun-woo
Debt in Korea’s household and corporate sectors was almost double the country’s GDP, according to a report from the central bank, Tuesday.
Also, the two sectors displayed a contrasting move in credit leverage this year, with household credit showing substantial growth while corporate growth was slowing.
According to the Bank of Korea (BOK) report, the country’s private credit to nominal GDP ratio has grown to 197.8 percent in the third quarter this year.
The ratio stood at 194.4 percent at the end of 2015, but steadily increased to 195.7 percent in the first half of this year and 197.8 percent in the third quarter, hitting a record high.
During the breakdown, the rise was buoyed by the sharp rise in household credit. At the end of the third quarter, the household credit to nominal GDP ratio stood at 91.8 percent, up 3.4 percentage points from that at the end of 2015. During the same period, however, the GDP ratio of the corporate sector stayed flat, remaining at 106 percent.
At the end of the third quarter, household debt stood at 1,295.8 trillion won, up 11.2 percent year-on-year. The household debt-to-disposable income ratio also rose by 7.4 percent in the first three quarters this year to reach 151.1 percent.
“Overall debt repayment capacities appear good, but there is a potential for debt repayment capacities to fall, especially among vulnerable households because of factors such as potential delays in economic recovery or the upward pressures on interest rates,” the BOK said in its report.
The BOK said upward pressures require more attention because of the high proportion of floating-rate loans here. At the end of the third quarter, the proportion of floating-rate loans to household loans extended by local banks was 71.6 percent.
“The rise of the interest rate will cause extra burdens for low-credit and low-income groups who are supposed to have more floating-rate loans compared to other income groups,” the report read. “If the recent trend of market rates hike continues, vulnerable households in particular could face debt repayment problems, though the possibility of rate hikes becoming risks affecting all financial sectors is not figured to be great.”
On the other hand, the increase in corporate credit was slowing because of continuing slumps in business conditions and credit concerns over ongoing corporate restructuring. This has improved the financial soundness of many companies, but the BOK warned that their financial stability may decline if the slump in business conditions continues.
In an overview, the central bank said the financial market has maintained stability, despite vulnerabilities stemming from snowballing household debt. However, it added that high uncertainties surrounding domestic and external conditions and the potential delay of corporate business conditions require concerns that financial stability could decline.