INTERVIEW Korea's economy strong amid economic resiliency, solid quality of institutions: Moody's
Deborah Tan, Credit Strategy & Research Group assistant vice president at Moody’s Ratings / Courtesy of Moody’s Ratings
Korea does not face an imminent risk of an economic crisis, buffered by a strong external payments position, economic resiliency and solid quality of institutions, a senior analyst at Moody’s Ratings said.
The country’s limited financial stability risks are mitigated further by declining household debt-to-disposable income ratio and a high level of household financial assets compared with liabilities, according to Deborah Tan, Credit Strategy & Research Group assistant vice president at Moody’s Ratings. The Singapore-based economist leads Moody’s thematic research with a focus on producing forward-looking macro-credit insights and outlooks.
Both housing and jeonse prices appear stabilized since the second half of 2023, with jeonse default concerns reduced. Unique to Korea, jeonse is a home renting system whereby tenants pay a lump-sum refundable payment in lieu of monthly rent.
The responses followed a request for an assessment of Korea’s sluggish housing prices eroding household wealth and its impact on private consumption in the country’s gross domestic product (GDP) profile.
“In addition to negative wealth effects from weak house prices, higher interest rates have elevated the debt service burden of households,” she said in an interview with The Korea Times. “Together, these could weigh on purchasing power for a while until we see a firm recovery in house prices.”
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The newspaper sent a list of questions after reviewing the State of Korean Consumer report authored by the global credit ratings agency.
Q: Demand for services as measured by Korea's current account shifting to financial services is eye-catching, all the more so given the highly pronounced pace of its increases over other services. Can you go into detail as to what is driving the demand for the financial services and why as well as whether it would continue to inch up, and if so for how long?
A: Activities from three types of financial services providers have been driving the healthy overall growth in financial services post-pandemic. They are commercial banks, credit unions and savings institutions and credit providers including financial leasing, credit cards and installments. Some of this growth could reflect a shift to a higher adoption of digital finance services in the post-pandemic era.
Q: How large of a deterrent do you think the Bank of Korea's restrictive policy poses to the country's growth? What are the most prominent factors that push back the central bank's monetary easing?
A: The BOK has acknowledged that so far economic growth prospects are improving largely due to the export sector and recovery in the global IT cycle. Consumer and business confidence indices are holding up despite higher borrowing costs. In its April statement, the monetary policy board noted that several factors still support their restrictive policy approach including uncertainty around the stance of global monetary policies, particularly the Fed’s, depreciation pressure facing the won developments brewing on the geopolitical front as well as potentially rising commodity prices.
Q: Asset-to-liability position is improving across the board. But the first income quintile group is experiencing the second-fastest improvement in the position. Curious as to what explains the trend, since those at the lowest end of the income spectrum still has the heaviest debt service burden. Can we then infer that the financial strains of the lowest income earners are easing?
A: For the first income quintile, the improvement in the asset-liability position came mainly from an increase in assets, accompanied by a smaller reduction in liabilities. Regular income growth for the first income quintile was also the highest across income groups. This could reflect the recovery in contact-intensive service industries and increase in part-time workers post-pandemic. We have also seen household liabilities fall for lower income households post-pandemic in other economies, such as the U.S.
Q: An increasing number of homes are being foreclosed and equally high numbers of low-credit borrowers and small businesses are defaulting on their debts. How serious of a financial stability factor do you think this would become?
A: The defaults observed have mainly been in vulnerable segments where the debt repayment burden is elevated. However, overall bank and non-bank household loan delinquency rates remain relatively low, especially compared to global standards. According to the BOK, vulnerable borrowers with higher default risk account for a relatively lower proportion — about 6.5 percent of the total borrowers of household loans. As such, Korean financial institutions should be able to manage this growing but contained risk.