Korea's household debts outpace national GDP

Despite its tight monetary policies for nearly two years, Korea tops the list of major global economies with the highest number of indebted households, taking into account the size of its economy. Notably, Korea is the only country where household debts exceed the Gross Domestic Product (GDP). The nation must implement proactive measures to alleviate the burden on households. The mounting debts, exacerbated by the ongoing economic downturn, pose a significant risk not only to the financial sector but also to the overall national economy.

According to the 2023 Global Debt Monitor by the Institute of International Finance, Korea has the highest household debt-to-GDP ratio among the 34 assessed states, reaching 102.2% in the first quarter. Despite the debt increase slowdown due to the Bank of Korea raising benchmark interest rates, Korea's top ranking in household debt remains concerning. Analysts suggest that small businesses and individuals heavily relying on debt for investments during and after the pandemic have pushed household debts to unsustainable levels.

Korea's high household debts exceeding 1,800 trillion won may worsen due to economic slowdown and inflation, potentially leading to widespread bankruptcies and bad loans for vulnerable families. In the first quarter of 2023, an alarmingly high 27% of Korean households spent more than their earnings. The delinquency ratio for savings banks, commonly used by individuals with low credit ratings, exceeded 5% on average by late March. Economically vulnerable groups, including those with low credit ratings, low income, and struggling small businesses, are at the forefront of the impending debt crisis.

Downgraded annual economic growth forecasts by both local and international institutions have placed Korea's growth rate barely above 1%, heightening the risk of exacerbating the nation's economic recession through dangerously high household indebtedness. A recent report from the Bank of Korea (BOK) warns that surpassing 80% of GDP in household debts would result in a declining growth rate and an increased risk of recession. Unfortunately, this threshold has already been surpassed by a considerable margin. Additionally, concerns are mounting as falling interest rates and increasing real estate transactions may contribute to a further rise in household debts.

Korea has long been burdened by substantial household debts, and it is crucial to prepare for the potential impact of additional debts from recent high-profile issues like housing rental deposits and loans taken by individual businesses, which are not included in official debt figures. With the government's pandemic-related loan repayments due by September 2023, time is running out. The Korean government and financial authorities must proactively reduce the overall volume of household debts while closely monitoring debtors who may struggle with repayment to prevent a broader economic impact.