{"id":2201596,"date":"2023-07-05T17:30:16","date_gmt":"2023-07-05T08:30:16","guid":{"rendered":"https:\/\/koreapro.org\/?p=2201596"},"modified":"2023-07-06T17:31:33","modified_gmt":"2023-07-06T08:31:33","slug":"managing-south-koreas-record-high-household-debt-a-dual-challenge","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2023\/07\/managing-south-koreas-record-high-household-debt-a-dual-challenge\/","title":{"rendered":"Managing South Korea\u2019s record-high household debt: A dual challenge"},"content":{"rendered":"
South Korea is the world\u2019s most indebted major economy, according to <\/span>data<\/span><\/a> from the Institute of International Finance, a U.S.-based trade group for global financial services. This puts Seoul at the forefront of a global issue that many countries grapple with and its position is not without considerable risks.<\/span><\/p>\n South Korea\u2019s household debt as a proportion of gross domestic product (GDP) stood at 102.2% in this year\u2019s first quarter, making it the only country whose household debt exceeded its GDP. The ratio was 105.5% in the same period last year.<\/span><\/p>\n Despite this slight reduction, South Korea\u2019s indebtedness significantly surpasses the levels witnessed in similarly developed economies.<\/span><\/p>\n Remarkably, the debt levels are even eclipsing those of countries grappling with serious economic challenges. Lebanon, for instance, borrowed <\/span>97.8%<\/span><\/a> of its GDP in the initial three months of last year, yet this figure still lags behind South Korea\u2019s.<\/span><\/p>\n The Bank of Korea (BOK), South Korea\u2019s central bank, seems to acknowledge the potential hazards tied to such elevated debt levels. Earlier this year, the bank\u2019s governor, Rhee Chang-yong, made a statement that highlighted the bank\u2019s awareness of these risks.<\/span><\/p>\n \u201cThe Bank of Korea, together with the government, will do its best in making sophisticated policy responses to achieve a soft landing of the South Korean economy,\u201d Rhee <\/span>said<\/span><\/a> in a speech at a New Year\u2019s event.<\/span><\/p>\n Rhee\u2019s comments underscore the precarious balance that South Korea must maintain between fostering economic growth and managing its considerable debt load. His reference to a \u201csoft landing\u201d underlines the necessity for cautious economic maneuvering to avoid triggering financial instability.<\/span><\/p>\n RAISING INTEREST RATES<\/b><\/p>\n The BOK has embarked on a cycle of interest rate hikes to curb further borrowing and stabilize the Korean won amid intense foreign exchange market pressures. From Aug. 2021 to Feb. 2023, South Korea\u2019s central bank has <\/span>raised<\/span><\/a> the benchmark interest rate 10 times. Currently standing at <\/span>3.5%<\/span><\/a>, the rates have been kept steady since February, yet the BOK maintains a hawkish stance, hinting at the possibility of further rate hikes.<\/span><\/p>\n Rhee <\/span>said<\/span><\/a> last month at the annual meeting of the Asian Development Bank that any suggestion of cutting rates would be \u201cpremature.\u201d<\/span><\/p>\n In theory, the BOK\u2019s strategy could reduce household debt levels. As access to cash becomes restricted and borrowing costs rise, consumer demand for additional debt usually decreases.\u00a0<\/span><\/p>\n However, an opposing concern is that increased interest rates exacerbate the cost of debt repayments. Given the already <\/span>tepid performance<\/span><\/a> of both the South Korean and global economies, raising rates could exacerbate the financial hardships of those already burdened with debt.<\/span><\/p>\n Raising interest rates will also have a significant impact on consumers. June marked the <\/span>highest consumer sentiment<\/span><\/a> in 13 months, fueled by the acceleration of post-pandemic activities and easing inflation. This uptick in sentiment reflects optimism about the economy\u2019s recovery and the return to normalcy.<\/span><\/p>\n However, increased interest rates could dampen this optimism as borrowing becomes more expensive and servicing existing debts becomes more burdensome. For consumers who rely on loans for major purchases or managing everyday expenses, higher interest rates could lead to financial strain and a possible downturn in consumer sentiment.<\/span><\/p>\n Inflation has recently shown signs of <\/span>slowing<\/span><\/a>, with consumer prices, a key gauge of inflation, rising 2.7% in June, down from a 3.3% and 3.7% year-on-year rise in May and April, respectively. This slower rate of inflation may provide some relief to consumers in the face of rising interest rates.<\/span><\/p>\n However, there are rising concerns about the ability of small business owners to manage these higher rates. As interest rates climb, small business owners, particularly those self-employed, increasingly <\/span>resort<\/span><\/a> to government funding to repay loans.<\/span><\/p>\n This trend raises red flags about potential loan defaults among this group, which could exacerbate financial instability in the broader economy. If these trends continue, they could counterbalance some of the recent positive developments in consumer sentiment and inflation.<\/span><\/p>\n