South Korea Household Debt Growth 3rd-Fastest Worldwide

South Korea's household debt grew at the third-fastest pace in the world in 2016 from a year ago, data showed Sunday, sparking concerns it may come as a time bomb for Asia's fourth-largest economy.

The ratio of South Korea's household debt to gross domestic product came to 92.8% as of end-2016, up 4.7 percentage points from a year earlier, according to the data from the Basel, Switzerland-based Bank for International Settlements, Yonhap reported.

Pace of growth marked the third fastest among 43 major economies in the world. Norway came in first with 6.3 percentage points, trailed by China with 5.6 percentage points.

Comparable figures were 79.5% for the United States, 58.6% for the eurozone, 62.5% for Japan and 87.6% for Britain.

The nation, considered one of the Four Asian Tigers, had the highest household debt-to-GDP ratio among the 21 emerging markets surveyed for 14 consecutive years, followed by Malaysia at 70.3% and Thailand at 70.2%. It ranked eighth among all 43 countries, with Switzerland topping the list at 128.4 percent.

The aggregated ratio of G-20 nations stood at 58.6%, while that of all 43 economies came to 59.5%. Emerging markets’ ratio reached 33%.

South Korea's household debt stood at $1.26 trillion as of the end of 2016, compared with its nominal GDP of $1.4 trillion estimated by the International Monetary Fund.

Switzerland had the highest household debt-to-GDP ratio of 128.4% last year, followed by Australia with 123.1% and Denmark with 120%, according to the BIS data.

South Korea's snowballing household debt is widely seen as a drag on its economy, struggling to boost still sluggish exports and stubbornly anemic domestic demand.

The burgeoning prospects of a 0.25% June rate hike by the US Federal Reserve this week, coupled with soaring prices of commodity foods such as eggs, poultry and instant noodles, are intensifying further pressure on household borrowers in South Korea.

Tightening LTV, DTI

Land minister nominee Kim Hyun-mee has picked the deregulation on loan-to-value ratio and debt-to-income ratio, indicators to determine the maximum amount of mortgages, as the “culprits behind rising household debt.”

The former Park Geun-hye administration had eased up on the LTV and DTI ratios by 10-20%, in a bid to take on the sluggish domestic economy. The move, however, ended up in more mortgage borrowing and speculations, leading to sharper increase in household loan.

Starting 2015, the household loan began to soar about 10% on-year, compared to the previous three years at around 6%.

The Moon Jae-in administration earlier in June called for a concerted effort from the state bodies to curb the rise in debt. The deregulation remains valid until July 2017.

Moon, who was sworn in May 10, told senior advisers to come up with a comprehensive package of measures in August to tackle the issue.

The government has reportedly mulled adopting the debt service ratio, which is expected to tighten room for maximum mortgage loans, as well as imposing a ban on transferring reselling rights for five years after contracts take effect and tightening the LTV and DTI ratios in overheated districts, such as Gangnam-gu and the adjacent Seocho-gu.

Use of AIIB

South Korea needs to expand into the growing Asian infrastructure market by making full use of the China-led Asian Infrastructure Investment Bank, a report by Seoul's central bank said Sunday.

According to the Bank of Korea's overseas economic focus report, the AIIB, while still young, can exert a positive influence on international investment and development.

"South Korean companies can use the infrastructure bank to make inroads abroad," the BoK said. It added local businesses, financial institutions and government need to work together to allow firms to secure projects going forward.

Data provided by such organizations as the Asian Development Bank predicted the infrastructure market among emerging Asian countries will reach $1.3 trillion annually in the 2016-2030 period.

The latest report added that the Export-Import Bank of Korea, Korea Development Bank and Korea Trade Insurance Corporation should offer financial counseling to South Korean companies, and that Seoul needs to work with other countries to remove administrative red tape that is holding back investments.