Korean economy struggles with soaring debt levels

The ratio of household, corporate, and government debt to Korea’s gross domestic product (GDP) reached 251.3% at the end of last year, marking an 8.6 percentage point increase from the end of 2020 when COVID-19 was at its peak. In contrast, the global average debt ratio fell by 40.3 percentage points from 285.4% to 245.1% during the same period. While many countries are tackling high interest rates and addressing excessive debt, Korea is reportedly pursuing a ‘debt reverse course,’ missing the critical period for deleveraging.

Economic entities in Korea, including households, corporations, and the government, are collectively mired in debt. Amid high prices and an economic downturn, there is growing reliance on loans among households, self-employed individuals, and small business owners. The government, spending beyond its tax revenues, is issuing bonds to further increase its debt. This approach of increasing debt rather than tightening belts has prolonged economic difficulties.

The repercussions of this approach are already apparent. The government budget recorded a deficit of 103.4 trillion won in the first half of this year. With 66% of the annual budget spent in the first half, there is insufficient capacity to address domestic demand contraction in the latter half. Household loans are surging due to policies encouraging borrowing, such as expanded low-interest policy loans and postponed loan regulations. Unstable housing prices and rising household loans have led the Bank of Korea to freeze the base interest rate for one year and seven months. The postponement of loan repayments for self-employed and small business owners since COVID-19 has resulted in numerous zombie companies.

Escaping the debt trap now requires drastic measures. Financial authorities have announced a “loan total system” to limit new loans from banks that have exceeded their household loan targets for the year. To address the ballooning debt resulting from failed regulatory measures, the government is implementing stricter controls on loans, which could negatively impact actual borrowers unrelated to housing speculation.