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South Korean companies’ debt is growing at the second-fastest rate in the world, even amid monetary tightening and high interest rates. The default rate is also the second highest in the world, suggesting that a significant number of businesses, including small business owners, are reaching their limits in averting crises through loans.
While South Korea’s household debt remains the highest in the world relative to the size of the economy, the ratio to gross domestic product (GDP) has fallen slightly from the second quarter to around 100%. The loans of South Korean companies and households, which are vying for the first and second places in the world, increased by 2 to 3 trillion won (approximately $1.7 to $2.5 billion) in just two weeks this month at the five major banks. It remains to be seen what impact the unbroken trend of private loan growth will have on the Bank of Korea’s benchmark interest rate decision on the 30th.
According to the International Institute of Finance (IIF)’s latest Global Debt report on the 19th, as of the third quarter of this year, South Korea’s non-financial corporate debt-to-GDP ratio (126.1%) was the third highest among 34 countries (single statistics for the Euro area). Only Hong Kong (267.9%) and China (166.9%) had higher ratios.
South Korea’s corporate debt-to-GDP ratio jumped 5.2 percentage points from the second quarter (120.9%), surpassing Singapore in just three months to rise to third place. This increase is the second highest in the world, following Malaysia. Compared to the third quarter of last year (120.4%), it is 5.7 percentage points higher, and the speed of increase over the year was the third fastest after Russia and China. This means that the speed of South Korea’s corporate debt growth is unusually fast compared to other countries, considering the high interest rate environment.
Moreover, the IIF compared the increase in corporate defaults (from the beginning of this year to October, compared to the same period last year) in 17 major countries, including South Korea, and South Korea ranked second with an increase of about 40%, following the Netherlands (about 60%). In the report, the IIF diagnosed, “Especially in many countries around the world, including Europe, as banks reduce private sector loans, signs of increasing vulnerability among low-credit companies are becoming increasingly clear,” and “This trend is reflected in the increase in the number of corporate defaults.”
In the case of household debt, South Korea’s ratio to GDP was the highest among the 34 countries at 100.2% in the third quarter. It has held the dubious honor of first place for almost four years since the start of the COVID-19 pandemic in 2020. The Bank of Korea recently warned in a research report that “if the ratio of household credit to GDP exceeds 80%, not only the medium and long term but also the short term growth rate will fall.” Only three countries, including South Korea, Hong Kong (95.2%), and Thailand (91.5%), exceeded 80%.
However, South Korea’s household debt ratio fell by 1.5 percentage points from the second quarter (101.7%) and 4.6 percentage points from the third quarter of last year (104.8%). Considering that household loans in the financial sector increased again in the last quarter, it is estimated to be due to the effects of economic growth (GDP).
The ratio of South Korea’s government sector debt to GDP (48.9%) was 22nd, a mid-to-lower level. Compared to the size of the economy, the countries with the most government debt were Japan (239.9%), followed by Singapore (170.8%), the United States (117.6%), and Hong Kong (103.4%).
However, the growth rate of South Korea’s government debt was among the fastest in the world. Compared to the third quarter of last year (44.2%), the increase (4.7 percentage points) was the fourth largest after Hong Kong, Argentina, and China.
Furthermore, the size of credit (debt) in South Korea’s private sector (households + companies) continues to grow in the fourth quarter, greatly exceeding the size of the economy. In October, household loans surged by 6.8 trillion won (approximately $5.7 billion) mainly due to housing collateral loans in banks, and jumped by 6.3 trillion won (approximately $5.3 billion) across the entire financial sector, including the secondary financial sector.
The increase in household and corporate loans shows no sign of slowing down in November. As of the 16th of this month, the balance of household loans at the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) was a total of 689.5581 trillion won (approximately $578.5 billion), an increase of 3.5462 trillion won (approximately $2.97 billion) in about two weeks compared to the end of October (686.119 trillion won, approximately $575.5 billion). Not only did housing collateral loans increase by 3.4175 trillion won (approximately $2.86 billion), but credit loans also increased by 310.6 billion won (approximately $260 million).
The balance of corporate loans (including large corporations and small and medium-sized businesses, including small business owners) is currently recorded at 766.3856 trillion won (approximately $642.4 billion). This is an increase of 2.696 trillion won (approximately $2.26 billion) compared to the end of last month. Compared to the end of last year (703.7268 trillion won, approximately $590.2 billion), corporate loans from the five major banks have surged by 62.6587 trillion won (approximately $52.5 billion) this year alone.
Especially in the case of corporate loans, the delinquency rate is also rising rapidly. According to the ‘Corporate Loan Status’ data submitted by the Bank of Korea to Yang Kyung-sook, a member of the National Assembly’s Planning and Finance Committee, as of the second quarter of this year, there were 3.5 million corporate loan customers in domestic banks, and their loan balance was 1,262 trillion won (approximately $1.06 trillion), both setting all-time record highs.
The balance of delinquent loans (based on principal and interest overdue for one month or more) of corporate loan customers was 4.7 trillion won (approximately $3.94 billion), the highest since the third quarter of 2019 (5.1 trillion won, approximately $4.27 billion), and the delinquency rate reached 0.37%, the highest level in two years and three months since the first quarter of 2021 (0.37%).
Earlier on the 23rd of last month, Changyong Lee, the governor of the Bank of Korea, stated at the site of the National Inspection, “First, we need to tighten regulatory policies again, and if the growth rate of household debt does not slow down, then we need to seriously consider raising interest rates.”
He added, “I believe it is my responsibility to gradually reduce the ratio of household debt to gross domestic product (GDP) to less than 100%, close to 90%, through our (Bank of Korea’s) interest rate or policy coordination with the government.”
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