Private-sector Debt Doubles Nominal GDP
The Bank of Korea announced on June 24 that the ratio of the private-sector credit to the nominal GDP reached 201.1 percent at the end of March this year, topping 200 percent for the first time in history. The ratio increased by 4.1 percentage points in three months to show the highest rate of increase since records began in 2000. Mortgage loans increased 5.7 percent from a year ago to result in a significant increase in household debts.
The debt-to-disposable income ratio reached 163.1 percent at the end of the first quarter, the highest since records began in 2007, with the pace of income growth failing to catch up with the pace of debt increase. This means South Korean households’ debt repayment burden is rising rapidly. Besides, their debt repayment capabilities may be further reduced as COVID-19 is continuing to affect employment and self-employed persons’ conditions.
The central bank warned that the pandemic may adversely affect enterprises’ financial soundness as well. According to the bank, their operating profit ratio, which was 4.8 percent last year, is estimated to fall to somewhere between 1.6 percent and 2.2 percent and their interest coverage ratio is estimated to fall from 3.7 to 1.5 or less during the same period. “In the worst-case scenario, the ratio of companies with an interest coverage ratio of less than 1 might rise to up to 50.5 percent,” it said.
The stability of financial systems is decreasing in the wake of COVID-19, too. For example, South Korea’s financial stability index (FSI) indicating an overall status of those systems jumped from 4.7 to 8.3 from January to February. An FSI of 8 to 22 means caution is required and an FSI of more than 22 means a crisis. The former indicates that financial systems are not seriously affected by internal and external impacts and the latter is vice versa. The FSI soared to 17.1 in March and 22.3 in April after falling to 18 last month.