Decrease in Saving and Increase in Debt, `The Crisis of Household`

As household loan and consumption increase, the saving rate of the first half of this year is the lowest since 1982, and as the result, the repayment ability decreases. So household sector is worried of `bankruptcy in rows`.

On the 23rd, according to the materials of `The Change of Saving Rate and the Cause` prepared Korea Central Bank, the aggregate saving rate in the first half of this year was 26.9% that was the lowest level since 1982 of 24.9%.

In 1998, household saving rate was 26.6% and higher than Japan of 17.7%, but in 2000 it was 15.4% below Japan of 16.3% by 0.9%.

According to the materials, the saving rate of low-income class was –4.9% in 1999, -2% in 2000, -2.3% in 2002 and –3.4% in the first half of this year. The minus saving rate of low-income class is analyzed that consumption is higher than income or accumulated saving was used for consumption.

In case of high-income class, the saving rate dropped from 36.3% in 1999 to 34.4% in 2000, but increased 36.2% in 2001 and 36.1% in the first half of this year.

According to the age group, the saving rate of the group of 25 – 29 years old dropped from 34.1% in 1997 to 23.9% in the first half of this year by 10.2%.

The income of top 20% is more than five time of bottom 20%, but the consumption of top 20% is only bigger than bottom 20% by 2.7 times. So the consumptions are not so different compared to the incomes. The decrease of saving rate, Korea central Bank analyzed, is due to the decrease of need of saving to possess own housing as the supply of housing increases. Additionally, as interest rate decreases household can borrow money at anytime.

Mogen Stanley announced that DCS (Debt Service Coverage) of Korean household dropped from 3.42 in the first quarter to 2.98 in the second quarter by 13%. DCS is a numeric index expressing household`s ability to repay debt.

3.42 of DCS Index mean that annual income is bigger than debt by 3.42 times. So as the index lower, the ability of repayment become lower.

Mogen Stanley analyzed that if interest rate increases by 0.5%, DSC will drop to 2.94, and if increases by 1% DSC drops to 2.89. “If the worst scenario happens such as household debt increases by 10% and interest rate increases 1%, household should use 38% of total income to repay the principal of debt.” And warned “The government should monitor carefully the increasing tendency of household debt for 3 to 6 months in the future.”

Kwu-Jin Lim Chi-Young Shin mhjh22@donga.com higgledy@donga.com