S Korea's leverage ratio vs GDP at record high Q2, and growth rate among highest: BIS

[Photo by Kim Ho-young]

South Korea’s private-sector debt has become twice bigger than its gross domestic product as the buildup accelerated in contrast to deleveraging in most developed economies, latest data from the Bank of International Settlements (BIS) showed.

The country’s private credit to nominal GDP ratio hit a record high of 218.1 percent in the April-June period after adding 1.9 percentage points from the first quarter and moving sharply up from 205.8 percent a year ago, BIS found.

The private credit to nominal GDP ratio, which compares total private sector loans, including household and corporate debts, against GDP using current prices, is used to see how stable a country’s credit market is. A higher ratio indicates the country suffers a greater debt burden.

In Korea, private sector debts grew 2.8 percent in the second quarter to outpace nominal GDP’s 1.9 percent, resulting in a higher ratio. This also means that the country incurred more debts than it earned.

Among 52 countries the BIS studied, only four countries – Korea, Greece, Hong Kong, and Singapore – saw the leverage ratio go up from the first quarter. The ratio came down for the other 48 countries.

Korea’s leverage ratio hovered sharply above the global average of 171.7 percent in 52 countries.

Within the G20 group, Korea was the only country to have the debt-to-GDP ratio rise. The average ratio of G20 members has been declining since the peak at 178.8 percent in the fourth quarter of 2020.

The surge in housing prices has a lot be to blame, said Yonsei University professor Sung Tae-yoon, finding the problem to continue unless the housing market stabilizes.

Private-sector debt load could pose as one of the biggest dangers to the economy, experts warn.

“Small businesses who cannot raise funds via securities have turned to loans to survive the pandemic whereas individuals must borrow to afford the soaring rent prices,” observed Oh Jung-keun, chairman of Korea Finance ICT Convergence Association.

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