The amount of debts owed by households and businesses in Korea was more than twice Korea’s gross domestic product (GDP). About half of the nation’s companies were unable to pay even interest on their debts with money they earned from sales, revealing their vulnerability.
The ratio of private credit to nominal GDP (credit leverage) stood at 224.9 percent as of the fourth quarter of 2023, according to the Financial Stability Situation Report released by the Bank of Korea (BOK) on March 28. Debts owed by households and businesses amounted to 2.25 times Korea’s nominal GDP.
While this ratio was down slightly from the record highs of the second quarter (225.7 percent) and the third quarter (225.6 percent) in 2023, debt remained more than twice as high as Korea’s GDP.
By sector, Korea’s household credit to nominal GDP ratio stood at 100.6 percent. This was down nearly one percentage point from the previous quarter (101.5 percent).
Korea’s corporate credit, on the other hand, stood at 124.3 percent, up from 124.1 percent in the previous quarter. It is also 5.0 percentage points above a long-term trend line compiled since 1975.
Looking at household credit, or the level of lending to households, by type, mortgage lending continued to grow but at a slower pace. Other loans, such as credit loans, continued to decline, meaning that only mortgages were still growing as households restructured their debts.
In the fourth quarter of 2023, total loans to households amounted to 188.64 trillion. The volume of household loans grew 0.4 percent quarter on quarter and 1.0 percent year on year.
The ratio of household credit to disposable income stood at 159.2 percent in the fourth quarter of 2023. Loans were 1.6 times larger than disposable income, exceeding the household income limit.
Corporate credit balance stood at 278.1 trillion won as of the fourth quarter of 2023. Overall, the delinquency rate in the fourth quarter (1.65 percent) was lower than the long-term average (1.81 percent from 2009 to 2019) but there was an upward trend centered on non-bank companies and SMEs.
The delinquency rate for non-bank corporate loans was 4.07 percent in the fourth quarter. The percentage was well above the average for the financial industry as a whole (1.65 percent). The delinquency rate for SME loans was 1.93 percent, also above the total average (1.65 percent).
While lending increased, key indicators of corporate profitability and stability declined. In the third quarter of 2023, companies’ operating margins were 2.5 percent and revenue growth was -4.0 percent, which turned into a quarterly decline.
The interest coverage ratio of companies stood at 1.6 times with 44.4 percent of vulnerable companies having a ratio of less than 1, meaning that they were unable to pay interest. Nearly half of all companies were unable to pay even interest on their debts even when they earned money.