The total debts owed by Korean households and companies reached a record amount of 4,345 trillion won (about 3,070 billion U.S. dollars) as of late June, a Bank of Korea report suggests. The total is 2.2 times the nation’s nominal GDP. The debt is astronomical, and the debt burden is snowballing due to rapid interest rate hikes. Unless the debt is adequately controlled, it could destabilize the financial system and threaten the viability of the Korean economy.
Household debts alone hit 1,869 trillion won (about 1,320 billion dollars) as of late June, up 3.2 percent year on year, while corporate debts reached 2,476 trillion won (1,750 billion dollars), up 10.8 percent year on year. Household debt growth is slowing due to a slump and a lack of home transactions in the real estate market. However, the growth pace of corporate debts is accelerating as more companies have faced soaring production costs, including raw material, labor, and utility expenses. If the interest burden increases, a growing number of companies that have had to increase borrowings due to financial crunch will be unable to repay their debts and become “zombie companies.”
Notably, debts owed by the self-employed, which jumped 15.8 percent to hit 994.2 trillion won (702 billion dollars) from a year ago, is a severe risk factor. While social distancing has been lifted, these people have been further hit by high-interest rates amid sluggish economic recovery. Because financial authorities have continued to extend maturity and defer the repayment of the principal and interest for self-employed people and small business owners, the problem has yet to surface but is increasingly deepening internally. There is a strong chance that excessive debts owed by younger people in their 20s and 30s will become a significant social problem. There are reportedly a growing number of cases wherein young Koreans isolate themselves and go into hiding after incurring significant financial losses due to plunging prices of stocks and virtual currencies that they invested with loans.
The spree of U.S.-led interest rate hikes will continue through at least early next year, while the global economic recession will be prolonged even further. Korea should practice an exit strategy to reduce household and corporate debts that have accumulated for more than two and a half years since the outbreak of the Covid-19 pandemic. Despite this situation, the government is reportedly considering extending the maturity of debts by three years and postponing the repayment of the principal and interest by one year for the self-employed and others.
If this practice continues, resources that should be invested in sound companies are spent on “zombie firms,” further worsening the financial problem. The government should practice debt adjustment programs for the economically underprivileged, including the working-class, and younger people. To single out sound debtors from insolvent ones, the government should empower financial institutions to use their discretionary power for corporate debts, including the self-employed. It should refrain from extending debt maturity recklessly and riskily like in Russian roulette.