The 3 major risks of Yoon Suk-yeol’s economic pledges

Posted on : 2022-04-05 17:00 KST Modified on : 2022-04-05 17:00 KST
From his supplementary budget to plans to relax loan and tax regulations, Yoon’s plans for the Korean economy are causing some to be concerned
President-elect Yoon Suk-yeol speaks at a plenary meeting of his presidential transition committee held at its office in the Samcheong neighborhood of Seoul on April 4. (pool photo)
President-elect Yoon Suk-yeol speaks at a plenary meeting of his presidential transition committee held at its office in the Samcheong neighborhood of Seoul on April 4. (pool photo)

While President-elect Yoon Suk-yeol’s transition team is in the process of setting its national political agenda, concerns about how to actually implement Yoon’s key economic pledges are being voiced both within his team and elsewhere.

During his campaign, Yoon promised to ease real estate and loan regulations and allocate 50 trillion won (US$41 billion) to compensate the public for damages caused by COVID-19. However, with inflation and housing prices on the rise, the economic environment in South Korea is calling into question the feasibility of Yoon’s promises. Even those within the presidential transition team are pushing for policies that may balance out the adverse effects that may result from Yoon’s proposed economic policies, such as the deregulation of finance and real estate.

Will Yoon’s 50 trillion won supplementary budget make high prices go up even more?

The biggest cause for concern is Yoon’s plan to draw up a revised supplementary budget to compensate small business owners for damages caused by the COVID-19 pandemic immediately upon taking office — despite inflation. If Yoon actually pours 50 trillion won into the economy as he promised, inflation, already on the uptick, may escalate even more.

Due to surging international raw material prices and higher exchange rates, domestic consumer prices are projected to have risen by 4% last month, double the target inflation rate set by the Bank of Korea (BOK) for price stabilization.

In the worst-case scenario, the massive revised supplementary budget may lead to more inflation and interest rate hikes by the BOK, which may in turn place even more of a burden on households trying to repay their debts, which may slow domestic demand, giving rise to a vicious cycle. Household debt in South Korea amounts to 1.8 quadrillion won.

Relatedly, Yoon told People Power Party lawmakers on Thursday that “too much inflation early in [his] term will be the beginning of [his] estrangement from public sentiment.”

There are signs that Yoon’s economic pledges may be revised. Late last month, during a meeting with his transition team, Yoon said that compensations amounting 50 trillion won including loan support, credit guarantees, and reemployment training support should be made by restructuring government expenses to exclude unnecessary ones.

In response, a high-ranking official from the Ministry of Economy and Finance interpreted that Yoon’s budget of 50 trillion won would include indirect subsidies for the public. In other words, Yoon’s transition team may include funds for various indirect subsidies as well as direct ones in its revised supplementary budget so that it can spend much less than 50 trillion won but still make an impact worth 50 trillion won.

Will easing loan regulations make household debt snowball?

Yoon’s pledge to ease loan regulations poses another dilemma. Yoon previously promised that he will standardize the loan-to-value (LTV) ratio, which ranges from 20% to 70% currently according to region, to 70%, and even raise it to 80% for young adults and married couples looking to buy a house for the first time.

The problem is that relaxing loan regulations may cause household debt, which jumped by 8% a year during the pandemic, to snowball even more. With the US gearing up to raise its interest rates, the move may place a heavier burden on households trying to repay their debts.

The International Monetary Fund (IMF) stated in its consultation report for South Korea as well that “household debt and house prices grew at unprecedented pace during the pandemic” in the country, with its household debt level “very high among OECD countries.” The organization then recommended that “borrower-based policies may need to be tightened further to contain the buildup of risks, while consideration should also be given to strengthening banks’ capital buffers for sector-specific risks linked to real-estate” — a policy direction that runs counter to Yoon’s campaign pledges. The IMF considers rising house prices and household debt as major risk factors faced by the South Korean economy.

This is why Yoon’s transition team is being cautious about easing debt service ratio (DSR) regulations, a key loan regulation along with LTV regulations. DSR determines a borrower’s loan amount according to their income. Won Il-hee, the transition team’s senior deputy spokesperson, said in a briefing Monday, “Because DSR can greatly impact the real estate market, [the transition team] hasn’t made a one-or-the-other decision between relaxing regulations or not.”

He added, “We are at a stage of comprehensively considering what the reasonable measure would be while watching the market situation.”

Meanwhile, the IMF urged South Korea to “introduc[e] a stressed DSR ratio to moderate borrowing risk in the event there is a snapback in lending rates.”

Will easing real estate regulations have repercussions on home prices?

Many are also concerned that the incoming administration’s move to lower the real estate holding tax and ease regulations on housing reconstruction will destabilize the real estate market even more.

According to the Korea Real Estate Board, apartment prices in Seoul’s Gangnam, Seocho, Songpa, and Gangdong districts rose slightly during the fourth week of March compared to the week prior, returning to an upward trend after falling for 10 weeks. The transition team may have factored in such concerns when it revealed that the incoming administration will temporarily lower heavy transfer taxes, which are imposed when those who own multiple houses sell their property.

Out of the many promises Yoon made regarding lowering real estate taxes, including holding taxes and acquisition taxes, the transition team chose to adjust heavy transfer taxes first, which may prompt homeowners with multiple properties to sell their properties, which would, in turn, increase housing supplies and help stabilize house prices. Adjusting real estate holding taxes, in contrast, may cause demand for housing to rise.

During a phone call with the Hankyoreh, Yonsei University economics professor Sung Tae-yoon said, “In terms of real estate and household debt issues, the housing supply should be expanded, while loans that consider the borrower’s income and repayment ability should be made to take place at the same time.”

By Park Jong-o, staff reporter

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