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Amid currency tightening and high-interest trends, South Korean companies’ debt has been confirmed to be the second fastest-growing in the world. The rate of bankruptcy is also the second highest globally, implying that many businesses, including small business owners and self-employed individuals, are reaching their limit in preventing a crisis with loans.
While South Korea’s household debt is still the highest in the world relative to the size of its 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 compete for the first and second places in the world, have increased by 2 to 3 trillion won in just two weeks at the five major banks this month. The continuous increase in private loans is expected to influence the Bank of Korea’s decision on the base interest rate at the Monetary Policy Committee on the 30th.
According to the latest World Debt report by the Institute of International Finance (IIF) on the 19th, as of the third quarter of this year, South Korea (126.1%) ranked third highest when investigating the ratio of non-financial corporate debt to GDP in 34 countries (single statistics for the euro area). Only Hong Kong (267.9%) and China (166.9%) surpassed South Korea.
The ratio of corporate debt to GDP in South Korea jumped 5.2 percentage points from the second quarter (120.9%), surpassing Singapore in just three months and rising one step 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 was 5.7 percentage points higher, and the growth rate over the past year was the third fastest after Russia and China. This means that the speed of increase in corporate debt in South Korea is unusually fast compared to other countries, even considering the high-interest environment.
Moreover, the IIF also compared the increase in corporate bankruptcies (from the beginning of this year to October, compared to the same period last year) in 17 major countries, including South Korea. South Korea ranked second with an increase of about 40%, following the Netherlands (about 60%). The IIF diagnosed in its report that “signs of vulnerability are gradually becoming clear among companies with low credit ratings, especially as banks in many countries around the world, including Europe, are reducing loans to the private sector,” and “this trend is also reflected in the increase in the number of corporate bankruptcies.”
In the case of household debt, the ratio of South Korea’s GDP in the third quarter was the highest among 34 countries at 100.2%. It has maintained the dishonorable first place for almost four years since the start of the COVID-19 pandemic in 2020. The Bank of Korea warned in a recent research report that “the ratio of household credit to GDP exceeding 80% not only reduces the medium and long-term growth rate but also the short-term growth rate,” and only three countries, including South Korea, Hong Kong (95.2%), and Thailand (91.5%), exceeded 80%.
However, the ratio of household debt in Korea 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 the fact that household loans in the financial sector increased again in the third quarter, it is presumed to be due to the growth of the economic scale (GDP).
The ratio of South Korean government sector debt to GDP (48.9%) was at a mid-to-lower level, ranking 22nd. 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 Korean government debt was relatively fast globally. Compared to the third quarter of last year (44.2%), the increase (4.7 percentage points) was the fourth largest, following Hong Kong, Argentina, and China.
Moreover, the scale of credit (debt) in the private sector (households + companies) of South Korea, which greatly surpasses the size of the economy, continues to grow in the fourth quarter. In October, household loans surged by 6.8 trillion won mainly from mortgage loans in banks, and it jumped by 6.3 trillion won in the entire financial sector, including the second financial sector.
The growth trend of household and corporate loans has not shown signs of slowing down since 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 689.5581 trillion won in total, an increase of 3.5462 trillion won in about two weeks compared to the end of October (686.119 trillion won). Not only did mortgage loans increase by 3.4175 trillion won, but credit loans also increased by 310.6 billion won.
The balance of corporate loans (including large corporations + small and medium-sized enterprises including small business owners) is currently recorded as 766.3856 trillion won. It also increased by 2.696 trillion won compared to the end of last month. Compared to the end of last year (703.7268 trillion won), corporate loans from the five major banks have surged by 62.6587 trillion won 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, the number of corporate loan borrowers in domestic banks as of the second quarter of this year was 3.5 million, and their loan balance was 1,262 trillion won, both marking the highest ever. The balance of delinquent loans (based on the principal and interest overdue for more than one month) of corporate loan borrowers was 4.7 trillion won, the highest since the third quarter of 2019 (5.1 trillion won), and the delinquency rate also reached 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 audit, “First, we need to tighten the regulatory policy again, and if the speed of increase in household debt does not stop, then we need to seriously consider raising interest rates.”
He also 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 interest rates and policy coordination with the government.”
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