ANALYSIS Korea awaits updates on key economic indicators before rate hike
Household debt, currency volatility critical factors amid Delta variant spread
By Lee Kyung-min
The Bank of Korea is anxiously awaiting the impending release of key economic indicators for July, which will make or break the case for its desired key rate hike.
Chief among the high-frequency indicators is household debt, which is certain to have increased amid the rapid rise in unsecured personal loans, due in large part to the heavy borrowing by retail investors participating in the initial public offering (IPO) craze, as well as low-income small business owners scarred by continued strict social distancing rules.
Mortgage loans have likely dipped to a degree, following the implementation of a debt service ratio (DSR) regulation, a stricter lending rule put in place to curb leveraged borrowing. Outstanding household loans increased to 41.6 trillion won ($36.3 billion) in the first half of last year, the highest six-month figure to date.
Seoul National University economist Kim So-young said the central bank will have to raise the key rate within the year, as part of what market participants should consider the beginning of a gradual normalization from the emergency expansionary policy relief brought on by the COVID-19 pandemic.
“Household debt has surged almost entirely because of the cheap borrowing rate, enabled by the emergency ultra-low key rate,” he said.
The newly implemented DSR regulation will not be as effective and broad-based as the central bank rate hike, since the tighter rule applies only to mortgage loan seekers.
The financial regulation is limited to mortgage loans, leaving a clear loophole that fails to rein in borrowing by individuals seeking unsecured loans. This in Kim's view will entail an unwanted increase in non-mortgage borrowing, and the total household debt will continue rising.
“The central bank rate hike is the most effective way to increase interest burden across the board regardless of borrowers' credit status or whether they are able to put up collateral, as opposed to selecting regulations that almost always leave room for borrowers to find a workaround and which therefore are not as binding.”
The next rate-setting meeting is scheduled for Aug. 26, to be followed by meetings on Oct. 12 and Nov. 25.
Indicators
Household debt is included in the financial market trend report which encompasses changes in volumes of and yields on government and corporate bonds, as well as changes in the volume of lending and deposits by banks and asset managers. Corporate borrowing and stock market review data are available.
The central bank data for June showed the outstanding household loan balance stood at 1,030.4 trillion won, up 6.3 trillion won from the previous month.
Mortgage loans reported a month-on-month increase of 5 trillion won, the third-largest June increase recorded in the 17 years the central bank has been releasing related data.
Rising housing prices including home sales and jeonse contracts pushed up the demand for mortgage borrowing, whereas the remaining 1.3 trillion won increase was sought by individuals without homes to put up as collateral.
Also to be released are export and import price indexes, which are separate from the more comprehensive terms of trade index and the net barter terms of trade index.
These are crucial figures that help provide a more accurate understanding of the country's trade conditions, as explained by factoring in the volume and prices of goods and services traded.
The latest June data showed the export volume index rose to 121.15, up 15.7 percent from a year earlier, continuing the year-on-year increases for the 10th consecutive month. This was carried by a strong combined increase of 68.7 percent reported by vehicles and semiconductors and a 16.1 percent jump registered by computers, electronics and optical equipment combined.
The U.S. dollar-based export value index also rose to 130.55, up 40.6 percent, extending the year-on-year increases for the eighth consecutive month. It was led by computers, electronics and optical equipment which reported a combined 29.4 percent increase, and a 45.7 percent jump registered by chemical products.
The net barter terms of trade index, a measure of the volume of imports that can be purchased through the sale of a single unit of exports relative to the base year 2015, fell 3.7 percent from the previous year.
This was because import prices registered an increase of 26.2 percent, showing faster growth compared with a 21.5 percent rise in export prices.
The income trade condition index, a measure of the volume of imports that can be purchased through the sale of gross exports relative to the base year 2015, rose 11 percent from the year before.
Data on economic trends and development in the global financial market will elaborate on how Korea's currency has fared against reserve currencies around the world.