Executive Summary
The Bank of Korea’s recent report, “Current Status and Implications of Corporate Debt in South Korea,” reveals a concerning trend. By the end of 2023, the total corporate debt had ballooned to 2734 trillion won, marking an increase of 1036 trillion won from the same period in 2018. This translates to an average annual growth rate of 8.3% over five years, significantly outpacing the nominal GDP growth rate of 3.4% during the same period. The debt-to-GDP ratio soared to 122.3% by the end of last year, a sharp rise from 92.5% at the end of 2017, indicating a 29.8 percentage point increase.
The Real Estate Sector: A Major Contributor to Debt Growth
The real estate sector has been a significant driver of this debt growth. Over the past decade, the vibrant real estate market in South Korea has led to a rapid increase in investment and development demands. From 2018 to 2023, loans to the real estate industry by the entire financial sector, including banks, securities, and insurance companies, increased by 301 trillion won. This accounts for 29% of the total increase in corporate debt during the same period. The loan balance for the real estate industry as a percentage of nominal GDP also rose from 13.1% in 2017 to 24.1% by the end of last year.
Corporate Debt Expansion Post-2020
Beyond the real estate sector, the debt of non-real estate corporations has also expanded significantly after 2020. Large enterprises, focusing on semiconductors, petrochemicals, and automotive battery industries, have substantially increased their investments. This has led to an 8.9% growth in loan debt for large corporations from 2020 to 2022, surpassing the 6.2% growth rate of small and medium-sized enterprises (SMEs). While the increase in debt has been accompanied by capital expansion, maintaining relatively stable financial ratios, the quality of corporate debt in South Korea is declining due to the long-term high-interest rates. Profits are increasingly insufficient to offset interest expenses, posing a risk to corporate financial health.
Alarming Debt Growth in Individual Businesses
The most concerning debt growth has been in individual businesses. At the end of 2019, before the pandemic, individual businesses owed 338 trillion won in the banking system. This figure increased to 423 trillion won by the end of 2021 and further rose to 450 trillion won by the end of last year. The average annual increase was 24 trillion won from 2017 to 2019, but it doubled to 54 trillion won from 2020 to 2022. The South Korean government’s efforts to mitigate the pandemic’s impact on small businesses and self-employed individuals, including policy loans at low interest rates and deferred loan repayments, have inadvertently contributed to this surge in debt.
The Aftermath of Government Support
As government financial support measures were phased out last year, many individual businesses faced the brunt of their debt, leading to a rapid increase in non-performing loans. According to the Financial Supervisory Service of South Korea, by the end of last year, the total overdue interest on loans to individual entrepreneurs from 20 banks reached 2.17 trillion won, an increase of 86.3% from the previous year. This figure is the highest since the service began providing these statistics, surpassing the record of 2.06 trillion won set during the international financial crisis.The situation may be even more severe than the numbers suggest. South Korean media estimates that over 1.7 million individual business owners are burdened with multiple debts, including bank loans. When considering borrowings outside of banks, the amount of overdue loans reached 12 trillion won in the third quarter of last year. As individual businesses continue to close due to financial difficulties, the vacancy rate for commercial properties in South Korea has risen sharply. Data from the Korea Real Estate Institute shows that the national vacancy rate for shops reached 13.7% in the first quarter of this year, surpassing even the rates seen during the pandemic.
The Current Economic Climate
The Bank of Korea has not yet announced a timeline for interest rate cuts, and the high inflation rate is negatively impacting consumer sentiment, exacerbating the difficulties faced by individual businesses. The latest data from the Bank of Korea indicates that South Korea’s consumer sentiment index for May was 98.4, falling below 100 points, signaling a further deterioration in consumers’ willingness to spend.