Household and corporate debt as a percentage of the gross domestic product (GDP) has decreased for the first time in five years and nine months, signaling a trend of adjustment for the surging debt due to the COVID-19 pandemic.
According to preliminary third-quarter cash flow data released by the Bank of Korea on Jan. 4, the ratio of private credit to GDP decreased by 0.1 percentage points, from 225.7 percent at the end of the second quarter to 225.6 percent at the end of the third quarter last year. The household credit ratio decreased by 0.2 percentage points, from 101.7 percent to 101.5 percent, while the corporate credit ratio increased by 0.1 percentage points, rising from 124.0 percent to 124.1 percent.
The decrease in the household credit ratio to GDP is practically the first time since a 0.3 percentage point decline in the fourth quarter of 2017. The contraction in the debt-to-GDP ratio for the third quarter is attributed to the impact of high-interest rates, leading to restrictions on loans. Household debt showed a declining trend, primarily driven by a reduction in credit loans. The corporate credit ratio to GDP, estimated by the Bank of Korea at 125.6 percent at the end of last month, saw a significant reduction in its upward trajectory due to a larger-than-expected decrease in real estate project financing loans.
While the decline in private credit is evident for the first time, it is still challenging to characterize it as a clear downward trend. The reduction is modest at 0.2 percentage points and the level remains high when compared to pre-COVID-19 levels.
As of the end of the fourth quarter in 2019, just before the onset of COVID-19, the proportion of private credit to GDP was 196.2 percent. Household credit accounted for 95.0 percent of the GDP, while corporate credit stood at 101.3 percent.
During the COVID-19 period, however, excessive liquidity supply led to an increase in the household credit ratio, reaching 105.7 percent in the third quarter of 2021. Although there was a slight decrease thereafter, it still exceeds the GDP level. This is attributed to the steady growth in housing-related loans.
Corporate credit has been on a continuous uptrend since the fourth quarter of 2017. Even in the third quarter of last year, the size of corporate funding increased from 21.1 trillion won (US$16.1 billion) in the second quarter to 33.4 trillion won, influenced by rising oil prices and wage increases.
The government emphasizes its commitment to managing the overall size of household debt, acknowledging the difficulty of reducing it outright. Instead, the focus is on slowing down the growth rate, boosting GDP growth, and thus reducing the debt-to-GDP ratio. In this regard, the decrease in the debt ratio in the third quarter of last year is seen as significant, marking the first decline in 5 years and 9 months.
The challenge lies in whether this reduction trend can be sustained. There is particular concern about the possibility of a rapid increase in debt this year. Large-scale execution of low-interest housing-related policy funds, including newborn loans, is planned. Additionally, expectations of interest rate cuts by the Bank of Korea further contribute to the concern.