Threat to Korean Economy
As the United States Federal Reserve has raised its interest rates on Dec. 17 (local time), the risks of large amounts of debt in the Korean economy are more likely to be become reality. Korea’s household debt stood at 1.166 quadrillion won (US$987.72 billion) as of September and are expected to surpass 1.200 quadrillion won by the end of the year. There is an increasing number of marginal firms that cannot even pay the interest on their debts with their operating profits. They are the “time bomb,” which will serve as the biggest risk factor for the Korean economy, when interest rates increase and the debt burden grows heavier.
According to financial experts on Dec. 17, the Bank of Korea (BOK) is expected to not raise the base interest rate for a while, but should brace for the possibility of the increase in market interest.
The BOK decided to freeze the nation’s benchmark borrowing rate at 1.5 percent at the last Monetary Policy Committee meeting of year on Dec. 10. It has maintained the rate for six consecutive months after reducing interest rates in June. Industry watchers believe that the BOK cannot raise the interest rates easily, as the domestic economy has entered a slowdown. A commercial bank president said, “It seems that the BOK can hold out without raising the interest rates until next year.”
However, the market interest rates will naturally be affected. Lim Hyung-seok, senior research fellow of the Bank and Insurance Industry Division at the Korea Institute of Finance, said, “We should entertain the possibility of the increase in market interest due to the supply and demand caused by the outflow of foreign currency. Considering the fact that the COFIX is currently increasing, market interest is affected by supply and demand instead of a reflection of base rates.”
As the U.S. interest rates will rise up to 1 percent by the end of next year, it will be a factor that forces domestic benchmark rates to be hiked up.
The movement of the market rate ascent is already shown in the domestic financial market. The COFIX, which is standard for mortgage rates, reached 1.66 percent in November, climbing for two months in a row.
Mortgage rates of commercial banks are also on the rise. Lending rates, which had been maintained at some 2 percent due to the decrease in the base interest rates in the first half of the year, have recently exceeded 4 percent, showing a steep rise.
Some experts say that corporate debt will be more serious than household debt. A high official from a commercial bank said, “When the market interest rates increase and there is a prolonged slowdown in the markets of emerging countries and China, there will be a good chance that exports will be cut and consumer confidence will shrink. Then, domestic conglomerates are most likely to see their debt burden growing and face difficulties in financing.”