Hoe Ee Khor, chief economist of the ASEAN+3 Macroeconomic Research Office (AMRO) / Courtesy of AMRO
Household debt continues to hamper private consumption
By Lee Kyung-min
The Korean economy faces uncertain growth momentum for the remainder of 2024, despite a surprise 1.3 percent quarter-on-quarter growth in the first three months of this year, the chief economist at the ASEAN+3 Macroeconomic Research Office (AMRO) said.
A pick-up in private consumption, construction investment and resilient export growth led to the stronger-than-expected gross domestic product (GDP) growth of Korea, AMRO Chief Economist Hoe Ee Khor said.
However, elevated borrowing rates due to the delay in Bank of Korea (BOK) rate cuts and household debt will continue to pose a drag on private consumption, already hamstrung by the slower-than-expected disinflation and the recent depreciation of the won.
The troubled construction sector will largely remain clouded by lingering challenges from project financing loans, as reflected in last year’s decline in housing construction starts. This will affect construction activity in the near term, in his view.
“The only bright side for Korea is the near-term sustained export momentum dependent upon the firm demand for semiconductors,” he said in an interview with The Korea Times.
Among key factors that will influence the timing of the BOK’s rate cuts are the strength of domestic demand and the trajectory of global oil prices and further delays in the U.S. Federal Reserve’s policy rate cuts.
The volatile Korean won is another factor. The won has fluctuated against the dollar in the range of 1,350-1,400 won per dollar since April this year, propelled by the dollar’s global strength.
“The combination of mentioned factors can push back the BOK easing,” he said.
AMRO is an international organization seeking to secure the macroeconomic and financial resilience and stability of its 14 member economies. Included are the 10 member states of the Association of Southeast Asian Nations (ASEAN), as well as China, Hong Kong, Japan and Korea.
Khor is responsible for overseeing and developing the work on macroeconomic and financial market surveillance of ASEAN+3 member economies. Prior to joining AMRO, he was a deputy director of the Asia and Pacific department at the International Monetary Fund (IMF), responsible for overseeing the surveillance work on six ASEAN and 12 Pacific Island countries. He obtained his bachelor’s degree in economics/mathematics from the University of Rochester and a Ph.D. in economics from Princeton University. Below is the full interview conducted with him.
Q. What is your assessment of Korea’s debt-to-GDP ratio? How much of an effort does Korea need to make to curb the growth of government, household and corporate debt?
A. As far as household debt is concerned, Korea ranks high in the region, at 98.9 percent of GDP as of Q1 this year, compared to the regional average of around 60 percent of GDP.
While the delinquency rate for household loans is relatively low, at 0.4 percent in February this year, it has been steadily increasing over the past year on the back of elevated borrowing costs.
Similarly, Korea’s corporate debt is higher than the regional average, at 157.6 percent of GDP compared to around 140 percent of GDP for the region.
The delinquency rate for business loans has been on an upward trend since around mid-2022, standing at 0.6 percent in February this year, driven largely by small- and medium-sized enterprises loans.
While the financial sector remains sound and adequately equipped with buffers to withstand some further deterioration in credit quality, relatively high debt burden for both the household and corporate sectors may continue to weigh on private consumption and investment, posing a drag on growth in the near to medium term.
As for government debt, Korea’s debt-to-GDP ratio jumped from 37.6 percent in 2019 to 50.4 percent in 2023.
Although the ratio is relatively lower than that of most other advanced economies, its persistent upward trajectory over the medium term is worrisome, given fiscal needs related to social protection and healthcare that are set to rise rapidly due to population aging.
As such, steadfast commitment towards fiscal consolidation is vital, and, in our view, enacting legislation of a fiscal rule is one of the measures that can help ensure fiscal sustainability over the long term.
Q. An increasing number of low-income earners and small construction firms are defaulting on their loans, fanning financial stability concerns. What is your assessment of the status quo? What are the ways to induce a soft landing of such vulnerabilities?
A. An uptick in defaults among low-income households and small construction firms is unlikely to pose a systemic risk to Korea’s financial stability, largely because these borrowers account for a small portion of total loans from financial institutions.
Moreover, the majority of bank borrowers are from medium- to high-income brackets, with substantial savings and financial assets.
However, pockets of risk remain within low-income households and small construction firms, which are the primary borrowers of small non-bank financial institutions.
Regarding the soft-landing of PF lending, we commend the authorities for the measures announced on May 13 that improve the evaluation of the financial viability of borrowers and introduce different policy responses to viable and non-viable borrowers.
We also agree that loan restructuring programs should be continued only for viable developers, with the focus on helping them navigate current economic challenges while ensuring the financial soundness of lending institutions.
Meanwhile, financial institutions should write off loans to non-viable borrowers.
Authorities should coordinate with financial institutions to ensure an orderly liquidation of bad assets to prevent fire sales of collateral that can dampen overall market prices.
Financial institutions highly exposed to weak borrowers should set aside more loan loss reserves and liquidity buffers.
