When Internal and External Shocks Intensify, Self-Employed and Vulnerable Borrowers Are on the Brink of Collapse (Comprehensive)

Loan Scale of Self-Employed as of Late September
887.5 Trillion KRW, Up 14.2% YoY
Exceeds Private Credit Growth Rate
Consumption Expected to Decline Due to Debt Repayment Burden
GDP Growth Rate May Drop Up to -3% According to Analysis

On the 22nd, self-employed participants at the "Self-Employed General Rally" held at Gwanghwamun Citizen Open Square in Jongno-gu, Seoul, urged the suspension of business restrictions and the quarantine pass system, as well as compensation for losses. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Jang Sehee] As the scale of private credit, including household and corporate debt, has grown to 2.2 times the gross domestic product (GDP), the Bank of Korea's warnings have become even stronger. It is expected that if domestic and external shocks such as base interest rate hikes occur, low-income households facing consumption constraints will increase by 30%, and GDP could decrease by up to 3%.

◆Household and Corporate Debt 3,343 Trillion KRW= According to the "December 2021 Financial Stability Report" released by the Bank of Korea on the 23rd, the debt of households and corporations in South Korea reached 3,342.7 trillion KRW in the third quarter of this year. The household credit ratio to nominal GDP rose by 5.8 percentage points year-on-year to 106.5%, while the corporate credit ratio also increased by 3.6 percentage points during the same period to 113.4%.

The ratio of household debt to disposable income also hit a record high, rising 8.1 percentage points year-on-year to 174.1% as of the third quarter. This indicates that the speed of debt increase far outpaces income growth.

◆Self-Employed and Vulnerable Borrowers Are Falling Apart= The rapid increase in debt is expected to directly impact vulnerable groups such as the self-employed and low-income households. As of the end of September, loans to the self-employed amounted to 887.5 trillion KRW, up 14.2% year-on-year, exceeding the growth rate of private credit. The business closure rate was low at 11.8% last year, indicating many "subsistence self-employed" who maintain their livelihood by borrowing money without closing their shops.

The proportion of real estate-secured loans among self-employed household loans was 69.3%, higher than that of non-self-employed borrowers at 55.7%. The Bank of Korea pointed out, "Self-employed individuals have a high proportion of real estate-secured loans other than residential properties, which have low liquidity, making them vulnerable to declines in real estate prices."

Professor Andonghyun of Seoul National University said, "The self-employed, who were hit hard by COVID-19, could cause shocks up to the middle class," and advised, "It is desirable to resolve this through policies such as personal bankruptcy applications and minimum living expense support."

◆Reducing Consumption to Repay Debt= The Bank of Korea also forecasted a significant contraction in consumption due to the increase in debt. The government is strengthening the Debt Service Ratio (DSR), which refers to the ratio of income to annual principal and interest repayment for new loans. The Bank of Korea pointed out that if the burden of principal and interest repayment increases due to excessive household debt, it will also affect disposable income. In this regard, it is estimated that if the household DSR rises by 8 percentage points, the proportion of households exceeding the threshold in low-income and youth groups will increase to 27.7% and 19.7%, respectively.

The Bank of Korea explained, "If the household DSR rises sharply, the consumption of low-income and youth groups is relatively more likely to be constrained."

The default rate and the scale of non-performing household loans are also expected to increase. Through stress tests, the Bank of Korea evaluated that if financial instability is combined with an economic downturn shock, the household loan default rate will rise to 1.18%, and the scale of non-performing loans will increase from 5.4 trillion KRW to 9.6 trillion KRW.

Considering only the domestic financial vulnerability index, the GDP growth rate is expected to decline by 1.4%, and when considering the financial vulnerability indices of major countries, the domestic economic growth rate could fall by up to 3.0%, the Bank of Korea added. Professor Andonghyun of Seoul National University’s Department of Economics said, "A GDP growth rate drop to -3.0% should be seen as the largest shock since -5.1% in 1998," adding, "It is a shock so severe that neither the government nor the market will have time to respond."

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