Last year, South Korea’s private debt growth rate relative to its gross domestic product (GDP) was reported to be the highest in the world. While households and businesses are reducing their debt in most countries in the aftermath of COVID-19, South Korea is drawing attention for moving in the opposite direction.
According to the “World Debt Database” released by the International Monetary Fund (IMF) on Sept. 13 (local time), South Korea’s private debt, including household and corporate debt, accounted for 281.73 percent of the GDP as of the end of last year. This marked an increase of 6.56 percentage points compared to 275.17 percent in 2021. South Korea’s private debt-to-GDP ratio ranked second among 26 countries with available data, trailing only Luxembourg at 464.83 percent.
Especially noteworthy is that South Korea had the highest private debt growth rate relative to GDP among the 26 countries. South Korea was the only country where private debt relative to GDP increased by over 6 percentage points last year. Japan took the second spot, rising from 224.33 percent in 2021 to 229.86 percent in the past year, an increase of 5.53 percentage points. It was followed by Jordan with 4.10 percentage points, Czech Republic with 3.29 percentage points, and Slovakia with 3.07 percentage points. On the other hand, the remaining 21 countries, including the United States, the United Kingdom, Italy, Germany, Canada, and the Netherlands, all experienced a decrease in debt.
Despite the Bank of Korea (BOK) raising interest rates last year and implementing a tightening policy, South Korea ultimately failed to curb private debt. Following its annual discussions with the South Korean government, the IMF recommended, “The country needs to make sustained efforts to gradually reduce the high levels of private debt.”
The global debt scale, encompassing both public and private sectors, is estimated to reach US$235 trillion. Public sector debt amounts to US$91 trillion, while private sector debt stands at US$144 trillion. The debt-to-GDP ratio was 238 percent. The IMF remarked, “Global debt only decreased by US$200 billion last year, indicating inadequate efforts in debt reduction by individual countries.” The IMF further emphasized, “The governments need to take urgent measures to reduce debt vulnerability and reverse the long-term growth trend.”
The surge in the proportion of private debt in the South Korean economy is a result of significant increases in corporate debt and households struggling to reduce their debt burdens.
According to the IMF, the proportion of non-financial corporate debt within South Korea’s private debt increased by 6.77 percentage points, rising from 166.84 percent in 2021 to 173.61 percent last year. This marked the most significant increase among the 26 countries with available data. On the other hand, the proportion of household debt decreased marginally from 108.33 percent to 108.12 percent, a decrease of 0.21 percentage points. Although household debt saw a slight decrease, it has still grown nearly as much as the expansion of the economy in relative terms.
On Sept. 14, the BOK also issued a warning about the increase in private debt in its monetary and credit policy report. Concerning household debt, it stated, “Unlike major countries, it has continued to increase without deleveraging, or debt reduction. It is assessed to have reached a level that undermines macroeconomic and financial stability.”
One of the reasons for the increase in household debt highlighted in the report is the excessive housing prices, as the market is recovering. According to the BOK, the price-to-income ratio in South Korea stands at 26, which means it would take 26 years of saving every single penny of one’s income to afford a house. The BOK’s analysis suggested that the housing market is still overvalued compared to fundamental economic conditions in South Korea.
Given the circumstances, household loans have shifted to an upward trend since April as the housing market shows signs of recovery. Over the past five months, loans, primarily driven by home mortgages, have increased by more than 25 trillion won. This has raised concerns that the household debt-to-GDP ratio, which had seen a slight reduction, may increase once again.
As of the fourth quarter of last year, the household debt-to-nominal GDP ratio reached 104.5 percent, significantly surpassing the threshold of 80 percent, beyond which debt’s negative impact on growth is known to expand. This level still remains high, far exceeding the median value of household debt ratios, which stands at 56.3 percent for 44 countries as compiled by the Bank for International Settlements (BIS).
There are also concerns about the deteriorating quality of household loans. The BOK noted, “The trend of rising delinquency rates for household loans continues, and delinquency rates among vulnerable borrowers are increasing rapidly compared to the overall borrower population.” The BOK’s assessment is that it could significantly reduce private consumption and have a negative impact on economic growth if household loans deteriorate, especially among vulnerable borrowers.
Corporate debt is also on the rise, despite the increased cost of fundraising due to rising interest rates and a slowdown in the housing market. This growth is particularly notable in real estate-related loans.
However, the BOK has not been actively addressing financial instability through monetary policy. Its stance is that macroprudential regulations from financial authorities should take precedence. During a press conference last month, BOK Governor Rhee Chang-yong said, “It is necessary to roll back eased regulations,” emphasizing that measures such as interest rates should follow regulatory actions.