World Economy

Mounting Debt, S. Korea’s Biggest Economic Setback

Mounting Debt, S. Korea’s Biggest Economic SetbackMounting Debt, S. Korea’s Biggest Economic Setback

Financial Services Commission Chairman Yim Jong-yong pinpointed household debt and corporate debt as the biggest potential problems for the South Korean economy, calling for “fierce reform” to guard against it.

“The debt problem, (particularly) household debt and corporate debt, is the biggest risk in our economy,” the chief financial regulator said in his year-end press meeting in central Seoul, Tuesday, Yonhap reported.

South Korea’s economy faces multiple challenges, including an uncertain global economic outlook, still-weak domestic consumption and record-high debt.

The country’s debt in proportion to gross domestic product reached 180%, the highest in its history, in the third quarter of 2015.

As of the end of November, local lenders’ outstanding won-denominated loans stood at 1,351.9 trillion won ($1.16 trillion), up 0.8% from a month earlier, according to data from the Financial Supervisory Service. Corporate loans constituted 766.7 trillion won of the total, up 9.6 trillion from a month before. The amount owed by households stood at 555.5 trillion won, up 6.4 trillion won.

New FSS data, out Tuesday, revealed the delinquency rates for both the household debt and corporate debt rose for the second consecutive month.

As of the end of November, the country’s average delinquency rate for won-denominated loans at local banks rose to 0.74%, up 0.04 percentage point from a month earlier.

Household delinquency rate rose to 0.42%, up 0.02 percentage point from the month before. The corporate delinquency rate stood at 0.99%, an on-month increase of 0.07 percentage point.

Following unceasing criticisms that the authorities overlooked the timely control of household debt to revive market consumption, the FSC has revealed the final version of the household debt control guidelines on Dec. 14. The guidelines are to go into effect on Feb. 1 in Seoul and the surrounding region and on May 2 in the rest of the country.

The household debt control plan mainly aims at driving borrowers to take out, or transfer to, “affordable” loans that come with no or drastically shorter grace periods and fixed interest rates. The plan also nudges lenders to strengthen loan assessment procedures to curb the delinquency rate.