Split Views
Expectations for economic recovery and concerns over indebted households are arising at the same time, surrounding the expansionary economic policy of the Korean government.
A potential problem, though, is that the Ministry of Strategy and Finance and the Bank of Korea, which are respectively in control of economic and monetary policy, have different views as to the issue to possibly cause confusion on the part of financial consumers. Deputy Prime Minister and Minister of Strategy and Finance Choi Kyung-hwan said in July that deregulation could reduce the household debt risk. However, central bank Governor Lee Ju-yeol mentioned, “We need to decrease the ratio of liabilities to income gently while improving the debt structure for some financial robustness.”
At least, the government and the central bank have a consensus that the expansionary economic policy would not result in a household debt crisis. The ministry is expecting that the policy would be a key to resolving the consumer debt risk. Minister Choi, who has adhered to the policy since his inauguration, has stressed that the problem can be addressed by increasing the disposable income of households while easing up on the loan-to-value (LTV) and debt-to-income (DTI) ratios. “A key rate cut would pose less interest burden on economic entities and encourage households to spend more,” he also said.
However, the Bank of Korea’s view is somewhat different, despite the consensus. “The pace of household debt increase is not a great concern as of now, but we will take a closer look down the road, because the ratio is quite high in view of the pace of income growth,” the central bank governor said at a press conference last month. He had also mentioned in July, “A key rate cut requires a very prudential approach, because a household debt increase could narrow the room for spending in the long term.”
Economists point out that the expansionary policy is just one month old, and thus more time should be taken before any judgment is made. Still, they agree on the necessity of tighter monitoring, since the household debt-to-GDI ratio is higher than in other major economies. “It is inevitable that deregulation by the government leads to an increase in household debts,” Soongsil University economics professor Jo Sung-bong commented, adding, “Though we are not at a dangerous level yet, we will have to take a careful look with time.”