One of the legacies of the recently-ended Park Geun-hye administration in South Korea is an explosion in household borrowing as Koreans took out loans at a record pace for homes, education, and to start small businesses.
“This year, household debt risk management is more important than at any other time due to increased uncertainties at home and abroad,” Zhin Woong-seop, governor of Korea’s Financial Supervisory Service, said this month.
Moon Jae-in, the favorite to win the next presidential election, which will be held on May 9 after the impeachment of Park this month, has vowed to tackle Korea’s mounting personal debt pile. Moon, a progressive politician from the Minjoo Party, placed the blame for Korea’s ballooning debt problem on his predecessors, Park and president Lee Myung-bak. Park’s administration loosened restrictions on mortgages, for example, to spur economic growth.
As individuals keep servicing these debts, that could weigh on consumer spending and government efforts to invigorate an already sluggish economy that has seen major industries such as shipping hit by slowing global demand. Korea today (March 28) reported its 2016 GDP growth rate, which was revised upward by 0.1 percentage point to 2.8%, somewhat better than 2015’s 2.6%, which was the slowest since 2012.
At the end of 2016, household debt in Korea, which includes household loans and credit card loans, stood at a record 1,344 trillion won ($1.2 trillion), up 11.7% from the previous year, according to the Bank of Korea, and equivalent to about 86% of GDP. That partly explains why there are so many fried chicken restaurants (paywall) around Korea—many people, especially retirees, pledge their homes as collateral to take out loans to open mom-and-pop businesses as many people are forced to retire in their 50s, according to the OECD (pdf, p10).
Korea’s vice finance minister said that the government plans to introduce measures in the first half of 2017 to tackle household debt, particularly among the self-employed, many of whom take out non-bank loans that carry higher interest rates. The recent interest rate increase by the US Federal Reserve, however, could complicate things for the Bank of Korea, which will also face upward pressure on interest rates, making it more expensive for individuals to pay off their debts. The Bank of Korea still has interest rates set at an all-time low of 1.25%.
A former Bank of Korea member told Bloomberg in November that the current household debt levels in Korea could spark another financial crisis in the country, like in 1997. The central bank, however, said in a report in June that default rates on household debt remained low, although debt was growing faster than disposable income.
Moon has said that he hopes to ease the burden of debt servicing by lowering the ceiling on interest rates on loans, increasing household income, and by keeping the ratio of household debt to disposable income at no more than 150%—according to OECD data the rate stood at 170% in 2015. The Korea Times in an editorial criticized Moon’s proposals for being nothing more than “populist” pledges that did not address the deeper systemic problems of unemployment and the need to shift away from Korea’s export-led economic model.