U.S. investment banking giant Goldman Sachs said Thursday that Korea’s household debt figures are exaggerated, and a liquidity crunch among indebted households is unlikely to occur, thanks to the country’s foreign exchange system.
“We think that widely quoted household debt figures are overstated in Korea. ... The numbers, widely quoted by the press, overstate the extent of household indebtedness substantially in our view, in terms of the coverage, cross-country compatibility and trends,” Goldman Sachs economist Goohoon Kwon said in a report.
Central bank data shows that Korea’s household debt reached 937.3 trillion won ($868 billion) as of end-2010, with the ratio of household debt to disposable income standing at 146 percent.
According to Kwon, the figure could decline by as much as 50 percent when excluding the country’s high portion of self-employed and family workers. About a quarter of the country’s workers are self-employed, a portion more than twice as large as in Japan and three times larger than in the U.S., he said.
Kwon noted household debt growth has been slowing after soaring between 2000 and 2002, when the Korean economy, Asia’s fourth largest, was recovering from the financial crisis.
The economist said a liquidity crunch among indebted households is unlikely, as the Bank of Korea can provide liquidity under its floating exchange rate system.
“The resulting depreciation of the KRW (Korean won) would help reduce the value of household debts relative to future disposal incomes either through inflation or by boosting exports,” Kwon said.
He, however, said a delay in policy rate normalization could pose a systemic risk to household debt. Keeping rates too low for too long would encourage further leveraging by borrowers and induce excessive risk-taking, which would make household debt vulnerable to economic downturns in the future, according to Kwon.
Kwon predicted the policy rate to rise to around 4 percent over the next 12 months. Korea’s key interest rate stands at 3 percent after the BOK froze it for the second straight month in May, citing economic uncertainties.
