hankyoreh

(Clip Art Korea)

The Bank of Korea (BOK) has voiced strong concerns about the overheated asset market and debt in the private sector, which has ballooned to twice the size of South Korea’s gross domestic product (GDP). Under the BOK’s worst-case scenario, worsening financial imbalance could push the growth rate to below -0.8% while causing a precipitous fall in housing prices.

The BOK also said an interest rate hike could cause the default rate for vulnerable groups to rise by 2 points. Its analysis appears to be a warning against investing with borrowed money when not only South Korea but the whole world is moving to tighten purse strings.

According to the BOK’s financial stability report for this month, published Tuesday, private credit was worth 216.3% of South Korea’s nominal GDP in the first quarter of 2021.

Korea’s nominal GDP in the first quarter amounted to 1,954 trillion won (US$1.72 trillion), while private credit — which includes corporate bonds and corporate and household loans, including loans from the government — amounted to 4,225.9 trillion won (US$3.72 trillion).

Household credit, at 2,045 trillion won (US$1.80 trillion), amounted to 104.7% of GDP, and corporate credit, at 2,180.9 trillion won (US$1.92 trillion), to 111.6% of GDP.

The percentage of household loan holders categorized as vulnerable — because they’re in debt to multiple institutions, have low income, or have poor credit — stood at 6.4% at the end of the fourth quarter of 2020, while 13.5% of debtors have a high debt service (DSR) ratio of at least 70%.

Given low interest rates, which make it easier to pay back debts, and government disaster relief during the COVID-19 pandemic, the default rate is currently 6.4% for vulnerable debtors and 0.8% for debtors with a high DSR ratio.

But the BOK believes there could be a dramatic increase in the default rate in the future. Many of these debtors hold variable rate loans, and the additional interest rate, which reflects credit risk, could rise rapidly if the base rate is increased.

In the BOK’s analysis, the default rate would rise 2.0 points for vulnerable debtors and 0.3 points for debtors with a high DSR ratio if interest rates go up. The BOK has recently hinted about the possibility of an interest rate hike within the year.

While low interest rates were instituted to help counter COVID-19, one side effect is that they aid risky investments in the asset market. The BOK said on Tuesday that rapidly climbing asset prices and excessive investment are bringing about financial imbalance.

“The accumulation of financial imbalance has increased downside risk in the real economy since the beginning of the COVID-19 crisis,” the BOK said.

The BOK said that, given the current level of financial imbalance, the GDP annual growth rate could fall below -0.75% in an extreme case — with a 10% likelihood.

The BOK also voiced worries about falling housing prices. Looking at long-term trends and important statistical indicators such as the profitability index, the bank said, it’s possible that the prices of real estate in the Seoul region are overvalued.

If an internal or external shock occurs when financial imbalance has accumulated, the BOK said, housing prices could fall by a large amount.

Amid the continuing financial imbalance, the downside risk for housing prices has greatly increased since the first quarter of last year.

The BOK is also concerned about virtual assets. “It’s difficult to find rationally explicable grounds for the surge in cryptocurrency prices since the outbreak of COVID-19.”

But since virtual assets in South Korea are estimated to be worth around 50 trillion won (US$44 billion) altogether — which is small compared to total market capitalization — the BOK doesn’t think the potential loss to individual investors would destabilize the financial system as a whole.

By Jun Seul-gi, staff reporter

Please direct comments or questions to [english@hani.co.kr]