As of the end of last year, South Korea’s household debt-to-GDP ratio reached 108.1 percent, making it the second-largest country in the world in terms of household debt relative to national economic size. It was ranked fourth globally in 2021, but it has climbed two more steps in just one year.
According to the International Monetary Fund (IMF) on Oct. 3, South Korea’s household debt-to-GDP ratio stood at 108.1 percent as of the end of last year, securing the second position globally after Switzerland with 130.6 percent. Until 2021, Canada held second place, but South Korea surpassed Canada, claiming the undesirable ranking of being the second-largest country in terms of household debt relative to GDP for the first time.
Compared to 2019, just before the COVID outbreak, South Korea saw the most significant increase in its household debt-to-GDP ratio by 10.5 percentage points from 97.6 percent to 108.1 percent in 2022, earning it the distinction of being the country with the largest increase. In 2019, South Korea ranked seventh globally in terms of household debt ratio. Among 26 comparable countries, 16 nations, including the United States, Canada, and the United Kingdom, succeeded in deleveraging post-COVID, but South Korea went against the trend, witnessing the most substantial surge in debt. Excluding South Korea, the average increase in household debt ratio among these countries where the debt ratio increased was 2.7 percentage points. South Korea also dominated in terms of the magnitude of household debt growth from 2017 to 2022, with an overwhelming 16.2 percentage point increase.
Experts consider the threshold at which household debt begins to negatively impact economic growth to be around 80 percent. At this level, the burden of principal and interest repayment can lead to a contraction in consumer spending. According to statistics from the Institute of International Finance (IIF), the average household debt-to-GDP ratio worldwide stands at 61.9 percent.
However, South Korea already exceeded this threshold in 2012 and has been witnessing a steady increase ever since. Without significant government measures, the Bank of Korea anticipates that household debt will increase by approximately 4 to 6 percent annually over the next three years. With economic growth slowing down significantly, it appears that the rate of household debt growth may outpace the growth rate. Therefore, there is a possibility that the household debt-to-GDP ratio could exceed 110 percent soon.
Furthermore, as households accumulate debt they encounter an unanticipated situation of soaring interest rates. This has led to the highest-ever interest burden relative to household income.
According to data from Statistics Korea on Oct. 3, household spending on interest costs in the second quarter from April to June averaged 131,000 won (US$96.25) per month. This is the highest amount recorded since statistics began in 2006. Household interest expenses increased by 52 percent in just two years, rising from an average of 86,000 won per month in the second quarter of 2021. As a result, the proportion of interest expenses to the average monthly income of 4,793,000 won also reached a historic high of 2.7 percent for the entire quarter. Among all households, 39.9 percent were paying interest, meaning that approximately 4 out of 10 households had interest-related expenses. It is likely that the actual monthly interest burden on households in debt is even higher than this figure suggests.
Bank of Korea Governor Rhee Chang-yong attended the National Assembly in late August and stated, “Both the government and the Bank of Korea share a consensus to make efforts over the next few years to bring down the household debt ratio to below 100 percent.”