Korea's Private Credit Likely to Surpass 200% of GDP

Not Only National Debt but Also Rapid Increase in Private Credit
Policy Response Needed Based on Total Debt

"Private Credit Growth Rate Deviates from Long-Term Trend, Causing Concern"
Real Economy Impact → Financial Distress → Risk of Further National Debt Increase

[Asia Economy Reporter Kim Eunbyeol] While concerns about the rapidly increasing national debt in response to the COVID-19 pandemic are significant, experts warn that the rapidly growing private sector debt must not be overlooked. This is because not only household debt, which has already reached an all-time high, but also companies struggling with cash shortages due to the COVID-19 crisis are sustaining themselves through loans.

According to the Bank of Korea and the Bank for International Settlements (BIS), the ratio of private credit (household debt + corporate debt) to GDP is expected to surpass 200% in the first half of this year. The Bank of Korea estimated that as of the end of last year, the ratio of private credit (approximately 3,781 trillion KRW) to nominal GDP (about 1,919 trillion KRW) was 197%. Given that GDP already contracted in the first quarter and private credit, mainly corporate debt, has increased significantly, the ratio of private credit to GDP is structurally bound to rise. On an annual basis, GDP is also expected to contract, which will likely cause the private credit ratio to surge compared to the end of last year.

Household credit, considered a chronic problem in Korea, has already reached a record high in terms of outstanding balance. According to the Bank of Korea, the outstanding household credit at the end of the first quarter was 1,611.3 trillion KRW, a 4.6% increase compared to the same period last year. Household credit refers to the total household debt, including loans from financial institutions such as banks, insurance companies, and lending firms, as well as credit card usage. Last year, household debt reached 83% of the gross national disposable income (approximately 1,930 trillion KRW), indicating a significant debt burden on households.

Corporate loans have also increased rapidly due to COVID-19. Loans by deposit-taking institutions by industry reached 1,259.2 trillion KRW at the end of the first quarter, with corporate loans increasing by 10.4% year-on-year in just the first quarter. Even considering that the recent growth in household loans has slowed due to government regulations on real estate loans, private credit is estimated to have increased by about 4-5% on average. A Bank of Korea official stated, "Although the corporate bond issuance market has contracted, reducing the scale of funds raised through bonds, the amount of funds raised through loans has increased enough to offset this decline."

More concerning than the absolute level of private credit ratio is the rapid pace at which private credit is increasing. According to the BIS data on private credit to GDP ratios, Korea's private credit ratio increased by 10 percentage points year-on-year in the fourth quarter of last year. Among the 43 countries tracked by BIS worldwide, the speed of increase in private credit ratio was the third fastest, following Hong Kong (+13.8 percentage points) and Chile (11.1 percentage points).

Therefore, experts advise policymakers to consider the total debt scale of households and corporations, not just the national debt ratio. So far, both the government and financial institutions have stepped in to provide artificial respiration to cope with COVID-19, but inevitably, there will come a time to remove this support, which could trigger defaults on bad loans.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "Looking at the BIS and other aggregated data, it is clear that Korea’s private credit growth deviates more from the long-term average trend. This aspect is more concerning than the absolute size." If companies fail to repay loans and go bankrupt, the government will ultimately have to intervene again for restructuring, leading to additional fiscal spending and a vicious cycle of increasing national debt.

This content was produced with the assistance of AI translation services.