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Korea needs to address inevitabilities of household debt: economists

June 28, 2017 - 18:16 By Paige Shin

South Korea does not face an imminent crisis over its growing household debt, but it needs to address some inevitabilities, foreign economists said Wednesday.

South Korea's household debt stood at 1,359.7 trillion won ($1.2 trillion) as of end-March, a dramatic increase from 665 trillion won at the end of 2007, according to the Bank of Korea.

The ratio of South Korea's household debt to gross domestic product came to 92.8 percent as of end-2016, up 4.7 percentage points from a year earlier, according to the data from the Switzerland-based Bank for International Settlements.

Christophe Andre, a senior economist at the Organization for Economic Cooperation and Development, said in an interview with local reporters on the sidelines of an international conference on rising household debt that Denmark and the Netherlands have much higher household debt compared to income in the past. He said that when housing prices fell following the 2008 global financial crisis it had a big impact on consumption and the economy of these countries as a whole.

The expert, however, said people were still able to repay their dues and the financial sector didn't experience a lot of problems.

"The problem is they had to cut their consumption to do this. And that's a risk also for Korea," Andre cautioned.

South Korea has announced that it will tighten lending rules on homes in some designated speculative areas to curb real estate speculation.

Under the measures to be put into effect July 3, the loan-to-value ratio in Seoul, Gyeonggi Province, some areas in Busan and the administrative capital of Sejong will be lowered to 60 percent from 70 percent. 

The debt-to-income ratio in the areas will be marked down to 50 percent from 60 percent.

Andre said South Korea's move is "appropriate."

Atif Mian, professor of economics and public policy at Princeton University, who is attending the forum on policy response to rising household debt, said South Korea has certain advantages in the event of an economic slowdown, citing its robust export sector, a floating currency and independent monetary policy.

"In the event of a slowdown you have an export market to look towards for sources of growth, for sources of demand, you have the monetary policy independence and exchange rate flexibility to absorb some of the shocks in terms of domestic demand slowdown," Mian said. All of those are positives for Korea.

Mian also said one of the reasons behind South Korea's increased household credit that has not resulted in any serious fallout has been that the country's interest rates have remained very low.

Still, he said it is hard to think of a world in which interest rates would increase rapidly.

Last month, the BOK unanimously voted to keep the key rate at 1.25 percent, extending its wait-and-see approach for the 11th consecutive month.

Mian-- co-author of "House of Debt" -- said that when credit slows down, it could exert negative influence on overall domestic demand for South Korea.

He said South Korean officials are caught in a catch-22 situation where they know credit needs to slow down, but when they take measures to slow down credit and are successful, they are faced with the problem of the overall economy taking a hit. 

"The key challenge for policymakers is to come up with a way where you can slow down credit growth but at the same time generate other sources of domestic demand," he said. (Yonhap)