Korea’s corporate debt-to-GDP ratio tops 120% in Q2

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South Korea’s corporate debt as a percentage of its gross domestic product (GDP) has rapidly increased, surpassing 120 percent in the second quarter of 2023. The surge is attributed to a particularly sharp rise in loans to vulnerable small and medium-sized enterprises (SMEs).

According to data released on Tuesday (local time) by the Institute of International Finance (IIF) in its “Global Debt Monitor” report, Korea’s corporate debt, relative to its GDP, reached 120.9 percent at the end of June, up by 1.5 percentage points from a year ago. The Global Debt Monitor tracks indebtedness by sector across key mature and emerging markets.

This is the first time Korea has exceeded the 120 percent threshold since the IIF began tracking the data in 1995. Notably, the trend of increasing corporate debt has persisted since the third quarter of 2019, when it crossed the 100 percent mark. In comparison, Japan, which ranks one spot below Korea in terms of corporate debt-to-GDP ratio among the 61 countries surveyed, recorded 116.1 percent in the second quarter, down by 1 percentage point.

One of the driving factors contributing to this surge in debt within Korea is the notable growth in loans extended to SMEs. Data from the Bank of Korea reveals that SME loans played a significant role, constituting 57 percent of the 20.8 trillion won ($15.6 billion) increase in corporate loans provided by deposit banks during the second quarter. The growth rate accelerated in the third quarter, with 60 percent of the 16.9 trillion won increase in corporate loans from deposit banks attributed to loans to SMEs in July and August.

Experts are expressing concerns about the excessive level of corporate debt, given the uncertain economic environment. Monetary authorities have indicated their intent to maintain relatively high-interest rates for an extended period, and measures including the deferral of loan repayments for SMEs and small business owners will end from October onwards.