Illuminated residential buildings and dusk houses in Mokpo, South Korea, Friday August 16, 2024.
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Central banks, overall, have a global mandate: to ensure price stability and control inflation in a country. Political decision -makers in South Korea must face another responsibility: managing high household debt.
References to household debt are often, if not always, in the monetary policy of the Bank of Korea.
The governor of Bok, Rhee Chang Yong, said in a speech on January 2 that “there had been criticisms of the reasons why the Bank of Korea takes into account household debt and seems too cautious when he decides basic rate “.
Why then, is household debt so important for BOK monetary policy considerations? The short answer: it’s too high. The long answer? Much more complicated.
Park Jeongwoo, nom economist for South Korea and Taiwan, told CNBC that the BOK was concerned about the long -term negative impact of higher household debt.
“The Bok thinks that (the) higher debt load has weakened the power of household expenditure. “”
Unique housing system
Two factors that contribute to the high amount of debt among households in South Korea are a high use of credit cards and the single housing system in South Korea.
Potential owners can of course buy their own house, but for those who cannot, they need to rent.
But unlike most world rental systems, South Korean tenants pay a deposit known as “Jesene” or “Clean Money”, instead of a monthly rent, according to Samuel Rhee, co-founder, President and group manager of investments for the wealth platform for Wealth Endowus.
The Jesen is a deposit of around 50% to 80% of the market value of the property. At the end of their lease, the deposit returned to the tenant. For the owner, the Jesse is an interest -free loan, which they are free to invest.
However, the tenants will generally contract a loan to finance the deposit of Jese, which, according to Rhee, causes “a lot of burden and excess debt in the housing system”.
He notes that if the overall debt of household / GDP debt has not increased significantly in recent years, the increase in interest rates has increased the burden of the debt service “, which has was the main concern for the Bok government and the Korean government. ”
Rhee stressed that if the BOK had reduced rates twice to bring them to 3% at the end of last year, banks have not reduced the interest rates lowered to consumers.
This means that if the BOK has reduced the rates, the interest costs of the tenants have not dropped.
“Economic disaster”
Ryota Abe, who is an economist in the Global Markets and Treasury Department for Asia Pacific from Sumitomo Mitsui Banking Corporation, said that the household debt ratio in South Korea was worrying because he could affect the country’s economic growth by making the sector fragile financial.
“In the case (a) Credit Crunch occurs because borrowers are unable to repay the debt because it is too huge, the question will result in deflationary pressures as well as an economic recession.”
Abe cited the figures of the Bank of International Settlements, which said that the South Korea’s household debt ratio amounted to 91% of GDP in the second quarter of 2024. In comparison, household debt in Other advanced countries is on average 68.9%.
By way of comparison, data from the International Monetary Fund showed that the country had the largest debt of households / GDPs among Asian countries in 2023, with 93.54.
China, the greatest economy in Asia, had a ratio of 63.67, while for India, it was 39.16. Japan had a 65.66 ratio in 2023.
Abe also said that the debt ratio has net disposable income was 186% in 2023 in South Korea, having climbed 130% in 2008.
The data show that the speed of the increase in debt is faster than the increase in wages and GDP, which implies that the South Korean economy, in particular the household sector, depends strongly on the debt, has declared Abe.
“In a case where the sector does not reimburse debt, negative shocks would be enormous, which would not be limited in the sector but in the financial sector. If such a shock occurred, the economy will be in disaster. Consequently , Korean authorities must reduce these risks in advance, “he added.
Bok dilemma
The Bok faces a delicate path. It must reduce rates to stimulate a slowdown saving and relieve the debt maintenance burden, but a drop in rates would weaken and could increase imported inflation.
More importantly, Rhee d’Endowus said that a drop in rate could stimulate an increase in potential house demand, leading to an acceleration of current household debt.
“If you lower interest rates and debt increases and this is used to stimulate housing demand, which leads to an increase in housing prices and rental prices, then it is inflationary and Bok would like Limit the inflationary impact, “said Rhee.
Alex Holmes, research director for Asia at The Economist Intelligence Unit, told CNBC’s “Squawk Box Box” earlier in January that 2024 was the first year that household debt had been lowered as GDP percentage. And the BOK will not also want to reduce rates so quickly to avoid a rebound.