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Rising Debt Levels
Data from the Bank for International Settlements indicates that, as of the second quarter of 2023, the ratio of household debt to GDP in South Korea stood at 101.7%. South Korea is among the few economies where debt exceeds GDP. The Korea Times conducted a survey among eight economists to forecast the economic outlook for South Korea in 2024. They anticipate a gradual decline in inflation rates, which would provide more leeway for the Bank of Korea’s expansionary monetary policy. However, they also warn that the increase in household debt poses a long-term threat to the South Korean economy, despite the low risk of widespread defaults in the immediate future. Faced with the trend of rapid population aging, they suggest that South Korea should accept more immigrants and invest in technology, as no government policy has been able to reverse the low birth rate.
Economic Downside Risks
Kim Wan-jung, Chief Economist at Hana Bank, stated that household debt is the biggest downside risk to the South Korean economy. He noted that the surge in household debt in recent years is largely due to the ultra-low borrowing costs that have persisted post-pandemic. “Many people have bought homes at record low interest rates, but the rapid tightening of the expansionary monetary cycle is increasing their interest burdens, reducing disposable income, and overall household purchasing power is declining.”
In South Korea, bankruptcies among low-credit, low-income borrowers are undermining the financial soundness of banks and other lending institutions, representing a series of key risk factors that require close monitoring. Cho Kyung-ryul, Chief Researcher at the Korea Economic Research Institute, stated that the long-accumulated interest burden is straining the finances of businesses and households, with concerns about insolvency intensifying, as evidenced by the recent surge in delinquency rates, which is a significant danger signal for South Korea in 2024. Jeon Kwang-woo, Chairman of the Korea World Economy Research Institute, identified household debt and project financing risks in the real estate sector as the biggest downside risks to the South Korean economy.
Regulatory and Policy
Kim Chang-hyun, Assistant Professor of Strategy at China Europe International Business School, opposes deregulation to reduce household debt but predicts that the upcoming 2024 National Assembly elections are also a tricky consideration. “The government will raise apartment prices in Seoul on the eve of the elections.” Sun Seong-won, a business economist at Loyola Marymount University in the United States, believes that the household debt issue can be alleviated through measures such as increasing employment, reducing prices, and the Bank of Korea lowering interest rates. “Compared to the United States, South Korean households have a significant amount of cash or cash equivalents on their balance sheets. Therefore, the debt burden is not as severe as it appears on the surface.” According to statistics from the Korea Trade Association, South Korea’s exports to China in the first half of 2023 accounted for 19.5% of total exports, a significant decrease from 25.3% in 2021. Zhou Yuan from the Hyundai Research Institute of Economics believes that the decline in exports will also hinder South Korea’s economic growth.