Household Debt Deepens Beyond Global Financial Crisis... Caution on Private Credit Expansion

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] An analysis has emerged that the level of household debt in South Korea has worsened compared to the 2008 global financial crisis. Since the surge in household debt following the COVID-19 pandemic, the situation surrounding household debt has been deteriorating due to interest rate hikes.

On the 7th, the Hyundai Research Institute released a report titled "Financial Instability Surpasses Long-term Equilibrium" which compared the volatility levels of the domestic financial market after the COVID-19 crisis (Q1 2020 to Q2 2022) with those during past economic crises.

The report selected and standardized indicators representing each financial market, then compared the volatility levels during the COVID-19 crisis with those during the Asian Financial Crisis (Q2 1997 to Q1 1999) and the Financial Crisis (Q3 2007 to Q3 2009).

As a result of the analysis, the degree of financial imbalance in households after the COVID-19 pandemic was 78.5, significantly exceeding the long-term average level (50.0). This was higher than the imbalance level during the past global financial crisis (75.4) as well as during the Asian Financial Crisis (52.5).

Financial imbalance refers to how excessively the credit (debt) levels of households and companies have increased compared to the real economy level such as Gross Domestic Product (GDP). A higher financial imbalance in households means that the growth rate of household credit has greatly exceeded the economic growth rate since the spread of COVID-19.

On the other hand, the degree of financial imbalance in companies during the COVID-19 pandemic was 71.9, lower than during the Asian Financial Crisis (89.5) or the Financial Crisis (76.3). However, it still significantly exceeded the long-term average level (50.0) and showed a continuous upward trend, the report analyzed.

The report pointed out, "Since the imbalance in the credit market has particularly worsened due to the impact of the COVID-19 pandemic, policy authorities need to manage the increase in household and corporate credit at an appropriate level."

It added, "With the prolonged Ukraine war and global monetary tightening, the economy is expected to slow down in the second half of this year and next year, which could lead to excessive expansion of private credit and increased volatility in foreign exchange and stock markets. It is necessary to closely monitor so that the expansion of credit risk due to interest rate hikes does not lead to economic contraction."

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