Korean Economic Landmines
Corporate and household liabilities are posing a threat to the national economy. The government has come up with various policy measures since the beginning of this year to tackle the problem, only to fail to serve the purpose.
According to the Bank of Korea’s report recently submitted to the National Assembly, the household debts based on the Household Credit Statistics of the central bank increased by 6.2 percent to 1.040 quadrillion won (US$975.4 billion) between June 2013 and June 2014. The increments were 5.2 percent and 6.0 percent in 2012 and 2013, respectively.
The rate of increase is higher than that of disposable income. Specifically, the ratio of household debt to disposable income was estimated at 135.1 percent as of the end of June this year, 0.4 percentage points higher than at the end of last year. On a Fund Flow Statistics basis, the ratio was 160.7 percent at the end of 2013, when the OECD average was 137.8 percent. Besides, the debts are likely to continue to increase due to the key rate cut and the LTV and DTI relaxations as of late.
In the meantime, major corporations’ dependence on borrowing went up from 25.2 percent to 25.4 percent during the first and second quarters of 2014. That of small and mid-size enterprises (SMEs) decreased by 0.1 percentage points to 23.5 percent. The overall average edged up from 25.2 percent to 25.3 percent.
The country's insolvency risk is approaching the 2008 financial crisis level. The debt risk of the 63 business groups subject to cross investment restrictions and having assets of at least 5 trillion won (US$4.7 billion) each was 19.1 percent as of June. In 2008, the percentage was 19.2 percent. According to the Bank of Korea’s stress test, the damage to the financial sector is estimated to be from 600 billion won (US$564 million) to 6.4 trillion won (US$5.9 billion) in the event of any individual insolvency.
Ten out of the 63 business groups have been found to be particularly risky. Their financial exposure with instruments such as private placement bonds was 44.8 trillion won (US$41.9 billion) in August. In a case when three groups go under at the same time, the financial institutions’ losses are expected to reach 14.5 trillion won (US$13.6 billion).
Major Korean companies’ sales fell by 0.7 percent between the first halves of 2013 and 2014. Those of large corporations decreased by 0.8 percent, while SMEs’ went up by 3.9 percent. In the first half of 2013, the rates of year-on-year increase were 0.4 percent and 1.3 percent, respectively. As of June 2014, 14.2 percent of the companies recorded a debt ratio of 200 percent or higher, while the percentage had been 15.5 percent during the same period of the preceding year.