President-elect Park Geun-hye is faced with many economic challenges ahead as Korea is about to enter a low-growth period, further weighed down by rising household debt and a rapidly aging society.

With her transition team in order, Park and her advisers are set out to improve the country’s financial soundness by first extending a support mechanism that aims to alleviate the growing debt of middle-income earners and credit delinquents.

As pledged, the incoming administration is expected to set up a fund worth some 18 trillion won, a bad bank of sort, to acquire overdue and bad loans owed to creditors by credit delinquents.

Such a move is aimed at easing debt obligations through low-interest repayment rates in the long-term, while upgrading their credits, as part of efforts by Park to boost the livelihood of low and mid-income groups.

“I will revive the legacy of ‘chal sara bose’ by reviving the fallen mid-income group,” Park said during and after her election campaign. “Chal sara bose,” or Let’s live well movement was launched by her father Park Chung-hee as a means to transform and boost the economy.

There are more than 3 million credit delinquents in the country, according to Park’s economic policy paper.

This plan also calls for rejuvenating those relying on state funds for basic living by reducing their debt by 70 percent, and 50 percent for other debtors through personal workout programs.

Rising household or personal debt has been a concerning factor for Korea’s economy, further troubled by its aging society and low birth rate.

These negative factors, analysts warned, could cast a shadow over its long-term growth.

Credit ratings agencies such as Moody’s indicated that household debt defaults could potentially create “shocks” in the financial market, equivalent to Korea’s 2013 credit card crisis and the global financial crisis of 2008-2009.

“We continue to view Korea’s high household debt as a credit negative. While we do not anticipate a trigger in the next 12 to 18 months that would pressure the banks’ asset quality, Korea’s household debt levels will pose significant tail risks for the financial system,” said Park Hyun-hee, an analyst at Moody’s Investors Service, in a statement in October 2012.

Korean banks have sufficient capital base to withstand possible household default, while the annual increase rate of debt has been modest.

However, data show some worrisome signs as Korea becomes the fourth country with the largest household debt compared to its gross domestic product among OECD members in 2011, following Ireland, Australia, and the U.S.

Korea’s household debt accounted for some 90 percent of its GDP, well above the standard limit of 75 percent recommended by the World Economic Forum, according to the International Monetary Fund and Korea Investment & Securities.

Furthermore, Korea’s debt-service ratio, measuring debt plus interest repayment capability, stood at 18.3 percent, close to the WEF’s 20 percent threshold, while its debt rate in relation to household disposable income stood at 164 percent, more than the U.S. 117 percent and Japan’s 132 percent.

All this means that Koreans’ debt repayment is dwindling going forward in part due to aging, which make it hard to hold onto their jobs.

Given Korea’s situation, President-elect Park has also introduced policies sustaining growth mainly through job creation and retirement age extension, rather than sharing a plan that promises to achieve a certain GDP rate.

She plans to introduce policies that support the elders to work at least until the age of 60, and promote youth employment by encouraging start-ups and ties between conglomerates and mid-size enterprises that could improve the country’s economic fundamentals.

By Park Hyong-ki (hkp@heraldcorp.com)