The ratio of household debt to gross domestic product (GDP) in South Korea increased at the second fastest pace in the world last year despite the government’s stricter household loan regulations.
The Bank for International Settlements (BIS) said on Jan. 6 that South Korea’s household debt was equal to 96 percent of its GDP as of the end of the second quarter last year. The nation’s debt-to-GDP ratio was the seventh highest among the 43 major economies that had relevant statistics. Switzerland ranked first with 128.8 percent, Australia second with 121.3 percent and Denmark third with 117 percent.
South Korea saw the household debt-to-GDP ratio grow 0.8 percentage point on-quarter, marking the second fastest expansion, following China’s 1 percentage point. The rate increased by 2.4 percentage points compared to the second quarter of 2017, ranking third after China with 3.4 percentage points and Denmark with 2.9 percentage points.
The rate also grew by 14 percentage points compared to four years ago when the household debt began to grow fast due to the government’s deregulation of loans. It came in third following China with 15.5 percentage points and Norway with 14.7 percentage points. Starting with housing measures on Aug. 2 in 2017, the government’s efforts to restrain household debt growth through tightened lending rules and the Bank of Korea’s decision to raise the key rate have helped slow the increase in household debt. However, the rate of debt growth still outpaces the nation's economic growth in comparison to other economies.
Korea's household debt is also increasing much faster than the nation's nominal economic growth rate of 4 percent to 5 percent. Household debt growth is slowing down but the burden of repayment is increasing. South Korea’s household debt service ratio (DSR) hit a record high of 12.4 percent as of the end of the second quarter last year. A household DSR measures the share of disposable household income used to service debt during a certain period and is considered as an indicator of the risks posed by household loans. The higher DSR means the higher burden on debt repayment.
South Korea’s DSR ranked sixth among the 17 countries that had relevant statistics. Its DSR growth rate on-quarter took first place with 0.2 percentage point. Considering the DSR trend, South Korea went counter to the current of major economies. Canada was the only country that showed a 0.1 percentage point growth in DSR, except for South Korea, while the rest saw the rate remain still or decrease.
Statistics Korea said the growth rate of household’s monthly average of disposable income on-year fell short of 2 percent since the third quarter of 2015.
The rate stood at only 1.4 percent in the second quarter last year as well. On the other hand, the annual interest rate of household loans based on the balance of deposit banks was 3.54 percent in the second quarter last year, reaching the highest for the first time in three years after 3.63 percent in the second quarter of 2015.