Private debt in Korea up $291 bn amid BOK’s steep interest rate hikes

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Private debt in South Korea has increased by 375 trillion won ($291.2 billion), approaching 5,000 trillion won, during the period when the Bank of Korea raised the benchmark interest rate by 3 percentage points amid the global tightening trend, an analysis showed Tuesday.

The number of zombie companies that are unable to cover interest expenses with operating profit has also exceeded 3,000 during the same period.

According to an analysis by Maeil Business Newspaper into Bank for International Settlements data, household and corporate debt increased 8.4 percent to 4,833 trillion won from 4,458 trillion won between the third quarter of 2021 when the BOK started its interest rate increase and the fourth quarter of last year. This is an accumulation of debt in the private sector exceeding twice the country’s total gross domestic product of 2,162 trillion won.

In particular, total household debt, including households and self-employed individuals, reached a record 2,260 trillion won at the end of last year. Corporate debt, excluding the financial sector, also increased to 2,573 trillion won.

The BOK raised the benchmark interest rate by 3.0 percentage points from August 2021 for 17 months to curb household debt and inflation.

After the rate freeze in February, the current rate stands at 3.5 percent. However, with the recent completion of the U.S. monetary tightening, it is expected that Korea’s interest rate increase is imminent.

There may be some time lag before actual rate reductions, nevertheless. Industry insiders noted that Korea faces the dual task of supporting the economy while conducting restructuring in the bad debt sector during this transitional period.

The deleveraging effect, in fact, was not significant despite the high-interest rate environment for 18 months. There were only two times when household debt decreased compared to the previous quarter - the fourth quarter of 2022 and the first quarter of 2023. The average reduction rate was only 0.5 percent.

“Household debt increased due to demand for investment in asset markets despite the high interest rate environment,” said Kim Jung-sik, a professor at Yonsei University. “The government’s relaxation of loan regulations may have contributed to concealing bad debts.”

There are also concerns about corporate insolvency as an aftermath of high interest rates.

A survey conducted by the Korea Economic Research Institute on 23,273 companies subject to external audits showed that the number of zombie companies with an interest coverage ratio of less than one for three consecutive years stood at 3,017 last year, up by 241 companies in just one year.

The figure shows that one out of ten cannot even cover interest expenses with their earnings.

Shin Je-yoon, former chairman of the Financial Services Commission, said that there is a need for the government and major banks to support preemptive restructuring efforts, such as improving the business structure and debt restructuring for shipping and logistics-related companies with high debt ratio due to the nature of their industry.