[Editorial] A looming debt crisis must be monitored

Authorities must closely watch the real estate market and the financially-weak and prepare multi-faceted measures against various scenarios.

The load of private debt towering over the Korean economy has grown, flashing red lights on an economy under sagging demand at home and abroad. According to a financial stability report by the Bank of Korea (BOK), the private debt of households and companies hit 223.7 percent of the nominal GDP in the third quarter. The percentage of private debt against national income has reached new heights as debt gains continued to overwhelm income growth.

The household debt ratio against nominal GDP fell to 105.2 percent in the third quarter, a 0.3 percentage point drop from the first quarter. But household debt remains at among the world’s top at 1,870.6 trillion won ($1.5 trillion) as of September, up 1.4 percent on year.

While household debt growth has slowed, the gains in corporate debt have accelerated sharply. Corporate debt hit 1,722.9 trillion won by the end of September, jumping 15 percent from a year ago. The data suggests the debt trap has become entrenched as economic slowdown is accompanied by rapid rises in interest rates.

The debt crisis looms heavier over the low-income and high-risk class. While the self-employed’s debt rose 14.3 percent to 1,014 trillion won at the end of the third quarter, the growth in loans to “risky” borrowers jumped higher, by 18.7 percent. Moreover, a soft-landing of the real estate market is uncertain. Unsold finished housing totaled 47,000 units as of the end of October across the nation, more than tripled from the last low of 14,000 units in September 2021.

Tenants fret that they won’t be able to retrieve their lump-sum deposits. According to the central bank, when jeonse prices fall 10 percent, as many as 44,000 landlords will have difficulty returning the lump sum deposits. The BOK assessed that resilience and liquidity status of financial institutions remain robust. But the debt crisis could pose a serious financial risk to the economy projected to perform under 2 percent next year.

Authorities must closely watch the real estate market and the financially-weak and prepare multi-faceted measures against various scenarios.