The U.S. tapering of quantitative easing is expected to further increase Korea’s household borrowing costs and pose a systemic risk to the real economy due to an increase in interest rates worldwide, analysts warned.
Korean households, whose outstanding debt reached some 1 quadrillion won early this year, will see their repayment burden rise due to higher interest rates in Korea once the Federal Reserve begins normalizing its monetary policy.
The interest rate on 10-year treasuries is projected to climb by 1 percentage point as soon as the U.S. central bank cuts back its monthly injection of $85 billion in liquidity.
“Korea’s market interest rate would also climb along with it,” said Jeong Young-sik, a researcher of Samsung Economic Research Institute, in a report.
Bank of Korea Gov. Kim Choong-soo warned of this systemic risk last June, saying that the cost of advanced economies’ exit from quantitative easing would “not be low” for Korea, and that policymakers would need to stand by to tame potential financial instability.
The BOK chief urged the financial services sector to boost their capital buffers before the tapering leads to a fall in bond values.
Korea may be heading for a solid recovery, but high household debt, which has grown faster than the country’s gross domestic product, stands in its way of achieving its traditional growth rate of 4 percent next year, analysts said.
“The continued rise in household debt has posed challenges to (policy) officials,” HSBC Global Research said in a report.
“In addition, irrespective of the risk associated with the composition of consumer debt, its size renders household spending sensitive to changes in interest rates.”
It remains to be seen when and how much the U.S. will scale back its stimulus, with market projections changing from later this year to early next year following the Federal Open Market Committee’s decision to maintain its quantitative easing this month.
“However, the market will have to brace for another FOMC meeting in December,” said Lee Sang-jae, an economist at Hyundai Securities, noting that the committee is likely to provide a clearer picture on quantitative easing in the next meeting.
Lee Jung-joon, an analyst at HMC Investment Securities, forecast that the tapering will strengthen the U.S. dollar, while increasing market volatility on foreign capital outflows.
Foreign sell-offs led the benchmark KOSPI to close at 2,025.17, down 0.70 percent on Monday, while the won lost 2.2 won to 1,062.9 won to the U.S. dollar.
