By Choi Kyong-ae
Korea is one of the Asian economies required to reduce their overall debt to avoid major risks to growth because the debt increase has gained speed recently, International Monetary Fund (IMF) economists said at a conference in Seoul Friday.
Developing Asian economies have grown since the 2008 global financial crisis on increased debt and leverage by individuals and companies in the private sector, said Ding Ding, senior economist at the IMF’s Asia and Pacific Department.
But debt in Korea and other Asian countries has reached threatening levels as they seek further monetary easing to support growth amid growing uncertainties such as the U.S. Fed’s anticipated rate hike next week and slowing demand from China, he said.
Some Asian countries now carry debt nearing levels that toppled major Asian countries in the 1997 Asian financial crisis. Korea went to the IMF to seek a $58.3 billion bailout in November 2007, following a severe liquidity crisis. The IMF extended a total of $19.5 billion, lower than the initially requested amount, to Korea.
“Concerns about leverage are again at the forefront of policy considerations in many emerging markets, including in Asia,” said Siddharth Tiwari, director of the IMF’s Strategy, Policy and Review Department. “Domestic and external leverage has increased in many countries since the global financial crisis, affected by global and domestic factors,”
Korea’s household debt marked a whopping $1,166 trillion won at the end of September, up 10 percent from $1,056 trillion won a year earlier, according to the Bank of Korea.
Government stimulus packages and monetary easing have allowed households and individuals in the past year to take more loans from banks at lower borrowing costs. The real estate market has somewhat revived since August last year when the government announced an aggressive stimulus program to support growth.
But Korea’s economy is likely to grow by 2.5 percent to 2.7 percent this year based on forecasts by think tanks such as the Korea Development Institute and the central bank. It grew 3.3 percent last year.
On Thursday, the BOK held the benchmark interest rate unchanged at a record low 1.5 percent for the sixth straight month to see how the global economy and markets will react to the Federal Reserve’s anticipated rate rise next week.
IMF economists urged concerted efforts from governments and central banks to keep excessive debt from leading to another financial crisis.
“Strengthening medium-term fiscal options and allowing monetary policy to respond appropriately to its objectives while letting the exchange rate play its buffering role are crucial,” said Tiwari. “The exchange rate should continue to function as a shock absorber as much as possible. Monetary policy settings should be adjusted in the context of the inflation objective.”