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Buildings and residential houses illuminated at dusk in Mokpo, South Korea, on Friday, August 16, 2024.
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Central banks, in general, have a general mandate: guarantee the stability of prices and control inflation in a country. Policy formulators in South Korea must deal with another responsibility: manage the high debt of households.
References to household debt often, if not always, appear in the Monetary Policy Decision of the Bank of Korea.
Bok governor Rhee Chang Yong, he said in A speech on January 2 that “there have been some criticisms about why the Bank of Korea takes into account household debt and seems too cautious when deciding the base rate.”
Why then, is home debt so important for the monetary policy considerations of the BOK? The short answer: it is too high. The long answer? Much more complicated.
Park Jeongwoo, Nomura economist for South Korea and Taiwan, told CNBC that the Bok is concerned about the long -term negative impact of a greater debt of households in growth.
“The Bok believes that (the highest debt load has weakened the power of household spending. At the same time, the strong debt -financed housing demand resulted in a distorted capital allocation throughout the economy, which led to a higher capital allocation to non -productive sectors.
Unique Housing System
Two factors that contribute to the large amount of debt between the households in South Korea is a great use of credit cards and the single housing system in South Korea.
Possible owners can, of course, buy their own houses directly, but for those who cannot, need to rent.
But unlike most rental systems worldwide, South Korean tenants pay a deposit known as “jeans” or “key money”, instead of a monthly rent, according to Samuel Rhee, co -founder, president and director of Group investments for the Endowus wealth platform.
Jeense is a deposit of approximately 50% -80% of the property market value. At the end of its lease, the deposit is returned to the tenant. For the owner, Jeense is a loan without interest, which is free to invest.
However, the tenants will generally obtain a loan to finance the Jeense deposit, which Rhee said that it causes “a lot of load and excess debt in the housing system.”
He points out that although the relationship of general debt of households to households has not increased significantly in recent years, the increase in interest rates has increased the burden of addressing the debt, “which has been the main concern for the Bok and the Korean government. “
Rhee said that, although the BOK had reduced rates twice to take them to 3% at the end of last year, banks have not transmitted lower interest rates to consumers.
This means that although the Bok has reduced rates, the interest costs of the tenants have not decreased.
‘Economic catastrophe’
Ryota Abe, economist of global markets and the Treasury Department for Asia Pacific in Summ Be fragile.
“In the event that (a) the credit crunch occurs because the borrowers cannot pay the debt, since it is too large, the problem will bring deflationary pressures and an economic recession.”
Abe cited figures from the Bank of International Settlements, which said that the debt index of the households of South Korea was 91% of GDP to the second quarter of 2024. In comparison, the debt of households in other advanced countries is 68.9 % on average.
Compared, International Monetary Fund data He showed that the country had the highest relationship of debt to households from home to GDP among Asian countries in 2023, in 93.54.
China, the largest economy in Asia, had a proportion of 63.67, while for India it was 39.16. Japan had a proportion of 65.66 in 2023.
Abe also said that the relationship between the debt with the available net income was 186% in 2023 in South Korea, having globalized 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 economy of South Korea, particularly the domestic sector, depends largely on the debt, said Abe .
“In a case in which the sector does not pay the debt, negative shocks would be huge, which would not be limited in the sector but for the financial sector. If such shock occurs, the economy will be in catastrophe. Therefore, the Korean authorities must reduce such risks in advance, “he added.
Dilemma
The Bok faces a difficult path. It must reduce rates to stimulate a deceleration economy and relieve debt service load, but a rate cut would weaken the profits and increase imported inflation.
More importantly, Rhee de Endowus said that a rate cut could stimulate an increase in the possible demand of houses, which leads to an acceleration in the debt of pending households.
“If interest rates and debt increases decrease and this is used to stimulate the demand for housing, which makes housing prices and rental prices increase, then it is inflationary and Bok would like to limit the inflationary impact “Rhee said.
Alex Holmes, Asia Research Director of the Economist Intelligence Unit, told CNBC. “Squawk Box Asia“In early January that 2024 was the first year when household debt had decreased as a percentage of GDP, and the Bok will not want to reduce rates too fast to avoid a rebound.
