Korea's Financial Stress Index indicates trouble remains

The Financial Stress Index (FSI) for Korea rose to a level that signals "danger" earlier this year and remains elevated, indicating that the economy is still under stress despite optimistic signs in recent weeks.

Bank of Korea Deputy Gov. Lee Jong-ryeol, center, speaks at a press conference held to discuss Korea’s financial stability in central Seoul on Thursday. [YONHAP]

The Financial Stress Index (FSI) for Korea rose to a level that signals "danger" earlier this year and remains elevated, indicating that the economy is still under stress despite optimistic signs in recent weeks.

Following the 2008 global financial crisis, it rose as high as 57.6, and for the next 11 years stayed well under 22, the line that indicates danger. It broke the 22 threshold in 2020, rising as high as 24.7 when the pandemic started, fell back, and then broke through 22 again in October.

That month, it peaked at 23.6. In November, it fell back to 23.0, according to the Bank of Korea.

The bank said "monetary tightening by key countries, high levels of household debt, a rise of real estate financing and a decline in the recovery of non-banking financial institutions” could add to the concerns.

The rise in the number of unsold houses, higher construction costs and a decline in rents could contribute to loan defaults for corporate real estate and project financing, the bank’s report read.

It noted the situation is not as severe as in the past.

The default rate for real estate project financing loans was 11 percent in late 2011, compared to the current 0.5 percent, said Lee Jeong-wook, director general at Bank of Korea’s Financial Stability Department during a press conference held in central Seoul on Thursday.

“But the interest rate was declining and the fall of housing prices was gradual in 2011, unlike the current stage of rising interest rates and a rapid fall of housing prices,” he added.

The bank noted the importance of managing private debt and the recovery of financial institutions.

Outstanding household debt in the third quarter grew 1.4 percent on year.

The bank also noted non-banking financial firms funding project financing for property construction.

Loans for project financing totaled 116.6 trillion won ($91.1 billion) in September, up 22.8 percent on year.

Project financing and the bond market have been hit hard by a series of convention-breaking events in the second half, including a default of a municipal government-guaranteed debt and Heungkuk Life Insurance’s decision not to redeem a perpetual bond.

Since then, the bond market and the currency have stabilized.

The won has strengthened considerably in recent days, trading to 1,276 on Thursday, but the government projects Korea’s economy to grow by 1.6 percent next year, much lower than the 2.5 percent forecast made in June.

BY JIN MIN-JI [jin.minji@joongang.co.kr]