Gov't turns eyes to cool household debt
By Park Hyong-ki
The government is expected to unveil a comprehensive measure to slow and reduce the country’s soaring household debt, following its recent policy aimed at curbing real estate speculation.
The Ministry of Finance, along with other agencies including the Financial Service Commission (FSC), land ministry and the Bank of Korea (BOK), will introduce a policy that could help reduce the debt in proportion to disposable income to a level on a par with the OECD average.
This comes as President Moon Jae-in pledged to stabilize the debt level in order to boost the livelihoods of the middle and working classes burdened by mortgages as part of the administration’s wage-driven growth plan.
Also, the central bank recently noted in a report that Korea’s household debt would drag down its growth in the long term, in addition to its aging population.
The ratio of household debt to gross domestic product was 93 percent as of the end of last year.
This is among the highest in the OECD. But given that countries such as Norway, Canada and Switzerland which have higher debt-to-GDP ratios are welfare states with sound social safety net systems, Korea’s debt level is troubling, it added.
Finance Minister Kim Dong-yeon said in a recent meeting with other ministers that it will come up with the debt-easing measure “focused on helping the low-income group” later this month.
This measure is expected to be implemented in tandem with the August 2 real estate policy as most people’s financial assets are tied to the housing market, analysts say.
Kim said that the government could draw an additional housing measure depending on the effectiveness of the recent one.
Last week’s policy included the designation of Seoul’s speculative zones and higher capital gains tax rates on multiple homeowners. Data showed that of those who purchased homes between 2013 and 2017, nearly 44 percent already had one.
“The low-income group faces risks of defaulting on their debt,” said Moon Jeong-hee, an economist at KB Securities.
Those with low income, poor credit ratings and multiple loans has debt worth 78.6 trillion won, accounting for about 6 percent of the total household debt as of the end of last year, according to the analyst, noting the BOK data.
This is low when compared to the rich whose debt accounts for 47 percent of the total.
But low-income households need to be managed because more than 40 percent of them have a negative cash flow. This means they are earning a lot less than what they spend or have to pay back.
“Three key factors need to be in the measure such as ways to help boost their income, slow down the increase in household debt and maintain the debt-to-disposable income at a suitable level in the long term,” Moon said.
Analysts also say that the central bank is unlikely to raise its interest rate until after the state measure has taken effect on the debt, as well as the housing market.
“Considering the current state of sluggish consumption, slow core inflation and an increase in household debt, and how that can affect the growth potential, we expect a rate freeze for the time being,” said Kim Ji-man, an analyst at HMC Investment & Securities.