South Korea Household Debt-to-GDP Ratio Reaches 90 Percent

The Korea Institute of Finance announced on February 26 that South Korea’s household debt-to-GDP ratio was 90% at the end of June last year, when the figure was 87.6% for Britain, 78.8% for the United States, 65.9% for Japan, 56.7% for France and 53.4% for Germany.

Between 2013 and the end of June 2016, South Korea’s household debt-to-GDP ratio showed an increase of 7.7 percentage points. During the same period, the ratios decreased from 87.7%, 80.9%, 66% and 55.3% in the respective cases of Britain, the US, Japan and Germany while that of France edged up from 55.6%, Yonhap reported.

Between the end of 2015 and the end of 2016, the household credit balance increased 11.7% and reached 1,344.3 trillion won ($1.20 trillion) in South Korea. The annual increment was the biggest ever with the balance breaking the 1,300 trillion won mark for the first time. For reference, South Korea’s annual economic growth rate stood at 2.7% last year.

 “Although most of the debts are currently held by high-income households with a sufficient repayment capacity, we need to pay attention to more vulnerable borrowers, that is, low-income and low-credit households, those with multiple loans and so on, with market interest rates facing an upward pressure and financial and economic uncertainties still going on both at home and abroad,” said Bank of Korea Governor Lee Ju-yeol.

According to the central bank, 1.41 million self-employed South Koreans had an outstanding loan balance of 464.5 trillion won at the end of September last year and the amount was approximately 78.6 trillion won, 6.4% of the total household loan balance, on the part of such more vulnerable borrowers.

Burden to Economy

Rising interest rates are expected to weigh on marginalized households, which sit on heavy debts. Experts also warn that the debt may end up negatively affecting the country's sovereign credit rating.

According to BoK data submitted to Rep. Kim Jong-min of the main opposition Democratic Party of Korea, a 1 percentage point rise in the interest rate for loans will lead to a 25 trillion won additional burden on "marginalized households".

Marginalized households refer to households with more financial debt than assets, spending over 40% of their disposable income to pay back loans. Around 1.5 million households, or 8% of the total, were estimated to be in that condition as of last March. They are burdened with 289.7 trillion won in financial debt, taking 32.7% of the total.

A simulation showed that a 1 percentage point rise in the interest rate will increase the number of marginalized households by 69,000. The annual interest burden per household also rose by 1.36 million won to 8.91 million won, with their total financial debt rising by 24.7 trillion won to 314.4 trillion won.

The interest rate has been rising during the past few months, with a further hike expected to come following possible key rate hikes in the United States. The interest rate on household loans averaged 3.39% last month, marking the highest level in 23 months. The interest rate at savings banks, which offer loans for those with relatively low credit ratings, stood at 11.75%.

Moody's also warned that South Korea's rising household debt poses downside risks to economic growth, pointing out that the debt increase is "credit negative" for the country.

"Households' high leverage raises their vulnerability to falling incomes or rising interest rates, which poses downside risks to consumption and growth," it noted, citing non-amortizing loans and floating-rate loans as threats.

Around 60% of mortgages are non-amortizing loans, where households only make interest payments until they reach final maturity. Floating-rate loans also make up around 60% of mortgages.

BoK governor told the National Assembly on Tuesday that the increase in household debt is due to the sluggish economy and poor job market, which negatively affects income. "Instead of taking short-term measures, the focus should be on attaining continuous economic growth."