More efforts to address the household debt issue are needed

The South Korean government and the ruling party held a high-ranking council meeting between the party, the government, and the presidential office for an emergency discussion on the rebounding household debt issue. “The household debt issue can bring impact dozens of times larger than the 1997 foreign exchange crisis,” Chief of Staff to the President Kim Dae-ki said during a meeting. It was the strongest warning among the comments made on the household debt risk. He also mentioned the previous administration and pointed out the risk of excessive loans and investing on margin by young people.

The huge amount of household debt exceeding over 1,800 trillion won is the biggest detonator threatening the South Korean economy. According to the IMF, South Korea’s household debt stood at 108.1 percent of its GDP at the end of last year, which is the second largest after Switzerland. The pace at which the country’s household debt increased over the last five years was the fastest among the 26 countries covered by the IMF data. The country’s household debt, which peaked at 1,877 trillion won in the third quarter of last year and began to decrease with a rise in interest rates, started to increase again in the first quarter of this year, reaching 1,863 trillion won in the second quarter. As people take out excessive loans based on the belief that housing prices hit the bottom, the household debt balance from the five major commercial banks increased by 2.5 trillion won in this month alone, which is the largest monthly increase during the last two years.

The lack of elaborate efforts to address the issue was a problem. While the Bank of Korea has been maintaining a high interest rate trend after increasing the base rate by two percentage points under the current administration, the financial authorities’ actions were not aligned with it as they put pressure on commercial banks to lower loan interest rates. Such poorly coordinated efforts went back to tightening loans again once household debts increased. The IMF’s recommendation to set macroprudential policies to manage risks associated with rising household debt should be carefully listened to.

For the measures to address the issue to be effective, the government and financial authorities should send consistent and continuous policy signals. There should be no exceptions or mismatched actions taken by different ministries. While it might be painful at the moment, household debts should be preemptively and gradually reduced by regulating loans to mitigate potential shock. It is also advisable to reduce special ‘pork barrel’ loans that are issued without much need.