Debt Putting Growth in Limit
The Bank of Korea said on August 6 that South Korea’s threshold debt balance-to-GDP ratio is 75% for households, 80% for enterprises and 90% for the government according to the World Economic Forum (WEF). Generally, the household debt is regarded to stand at the threshold when it reaches 75~85%, the enterprise 80~90% and the government 85~90%, respectively, slightly different depending on global research institute.
This means that South Korean households’ liabilities and the rate of increase in their liabilities have already increased to the point of limiting the country’s economic growth. According to the WEF, South Korea, Switzerland, Australia, Norway, Canada and Sweden are currently in such a state. In each of the six countries, the household debt-to-GDP ratio showed an annual average increase of more than 2% during the past five years.
When it comes to corporate liabilities, Hong Kong, China, Singapore, Chile, France, Belgium and Canada have been classified as those above their thresholds.
In these countries, consumption and investment can be affected by the burden of principal and interest repayment once global interest rates begin to rise in the near future. According to the Bank for International Settlements (BIS), an interest rate increase of 2.5% in South Korea is expected to cause the debt service ratio in the private sector to rise by 3.7 percentage points.
Still, the Bank of Korea added that the likelihood of a financial crisis is currently lower than immediately before the global financial crisis of 2007 and 2008 and the Asian financial crisis in 1997 and 1998. According to its report, this is because deleveraging is underway in certain European countries and the United States, macroeconomic conditions are improving, and emerging countries’ foreign exchange reserves and short-term external liabilities are not that risky yet.