Korea faces 'debt reversal' amid declining global debt

The burden of high interest rates has reached a critical level in Korea, yet the Bank of Korea is unable to lower rates quickly due to the immense household debt. The growing national debt limits the government’s fiscal options. This situation has led to concerns that the Korean economy is caught in a ‘debt trap,’ with no easy way out.

According to data from the Bank of Korea and the Bank for International Settlements (BIS) released on Monday, the combined ratio of household, corporate, and government debt to Korea’s gross domestic product (GDP) reached 251.3% by the end of the fourth quarter of last year. This marks an increase from 242.7% in the fourth quarter of 2020, during the height of the COVID-19 pandemic. In contrast, the debt ratio of advanced economies significantly decreased from 319.3% to 264.3% during the same period, while the global average also dropped from 285.4% to 245.1%.

Even when expanding the time frame to include the period since the 2008 financial crisis, Korea's household debt to GDP ratio has seen a significant increase, surging from 67.7% in the first quarter of 2009 to 93.5% by the fourth quarter of last year. In contrast, advanced economies have reduced their ratios from 76.4% to 71.8% during the same period. This discrepancy arises from Korea's debt growing much faster than household income. Korea's household debt to disposable income (DTI) ratio, which was relatively low at 138.5% in 2008, skyrocketed to 203.7% by the end of 2022. Meanwhile, the average DTI ratio in advanced countries has slightly decreased from 164.4% to 160.7% over the same period.

Some argue that Korea's debt crisis stems from avoiding the orthodox approach of reducing debt in a high-interest environment. Instead, the country has relied on temporary fixes that allow debt to persist and keep insolvent companies afloat. The Bank of Korea attributed this to "financial support measures being extended for a longer period than in major countries, amid ongoing demand for real estate-related loans."


Joo-Young Jeon aimhigh@donga.com