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Aps June 2013 Jongsung Kim Final

Aps June 2013 Jongsung Kim Final

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Published by: Korea Economic Institute (KEI) on Jul 08, 2013
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 ACADEMIC PAPER SERIES
Korea EconomicInstitute of America
1
The Impact of Household Debt on Korea’s Economy and Society 
By Jongsung Kim
Abstract
The topic of household debt has not only economic implicaonsfor consumers and the country as a whole, but it is also a signicantfactor aecng the social stability of its cizens. This problem alsoparallels the recent nancial crises in the U.S., the aermath of which sll plagues its economy. Against this backdrop, this paperaims to review and invesgate the trends and determinants
of the rising household debt and declining savings in Korea so
policies can be implemented to deter and eecvely counter
the problems that low savings and countervailing high debt will
pose on the Korean economy. This study will add to the exisngliterature by providing new evidence of its implicaons towardthe household debt problem in Korea. I argue that globalizaon,government policies and generous credit resulng from the lowinterest policy contributed to the increase in debt in Korea. Theght restricons on commercial banks’ lending pracces willput the borrowers at a much worse posion, exacerbang thelow saving and high debt problem. Despite the volume and theseriousness of the household debt in Korea, the eorts to reduceit have not been sasfactory. To address the rising householddebt problem, it is recommended that an acve intervenonshould be implemented toward job creaon, employmentsecurity and closer monitoring of the lending pracce. It is alsorecommended to oer more informaon about the loans for
indebted low-income class and to simplify the procedures to
apply for those loans.
Key words:
Korea’s household debt, Savings, Debt relief, Naonal 
Happiness fund 
1. Introducon
The rst years of 2000 marked the outbreak of the householddebt in Korea as the most signicant potenal risk factor that canthreaten the stability of the nancial system, especially when it islinked to the economic slowdown and ongoing real estate slumpaer the global nancial crisis.
1
On April 22, 2013, Bank of Korea (BOK) Governor Kim Choong-soo remarked that “The naon’s household debt reached alimit” in his report to the Korean Naonal Assembly. He wasalso recently quoted as saying, “The household debt has been
rising faster than income and the nature of household debt
has also deteriorated. Eorts should be exerted not only to
reduce the volume of debt but also to improve the vulnerable
structure of household debt.”
2
His remarks along with stascalevidence reported in the next paragraph signify the seriousnessof household debt in Korea. Against this backdrop, this paperreviews the trends of household debt in Korea and invesgatesthe background of its rise in recent years along with a discussionon the current policy measures taken by the Korean governmentto address the rising household debt.As of 2012 4th quarter, the household credit
3
in Korea reached
963.8 trillion
won
(USD 853.7 billion at the exchange rate of USD1=1129
won
on June 12, 2013) that includes householdloans of 905.9 trillion
won,
a 5.2 percent year-on-year increaseand a purchase on credit of 57.9 trillion
won
, a 3.1 percent year-on-year increase.
4
Since the household disposable income rose4.1 percent, the rao of household debt to disposable incomereached 136 percent, the highest level since 2003 when therelated data began to be collected. Accordingly, the household
Dr. Jongsung Kim
is a Professor of Economics at Bryant University in Smitheld, Rhode Island. Dr Kim’s paper is the y-ninth in KEI’s Academic Paper Series. As part of this program, KEI commissions and distributes approximately ten papersper year on original subjects of current interest to over 5,000 Korea watchers, government ocials, think tank experts,and scholars around the United States and the world. At the end of the year, these papers are compiled and published inKEI’s On Korea volume.For more informaon, please visit
www.keia.org/aps_on_korea
.
Korea Economic Instute of America1800 K Street, NW Suite 1010Washington, DC 20006www.keia.org
June 18, 2013
The Impact of Household Debt on Korea’s Economy and Society 
 
 ACADEMIC PAPER SERIES
2
 
2
debt per capita reached the highest level at 19.3 million
won
,
almost 74 percent of GDP per capita, as the average householddebt also increased to 53 million
won
.
5
The banking sectormortgage loan balance also rose to 316.9 trillion
won
at the end
of 2012 from 264.2 trillion
won
at the end of 2009, an increaseof 19.9 percent.Korea’s household debt also poses potenal threats tothe naon’s economy when the debt is viewed from theinternaonal perspecve. According to OECD stascs, whichalso include the nancial debt of non-prot organizaons, therao of Korea’s household debt to disposable income roseto 150.8 percent in 2010 from 116 percent in 2004 and 139percent in 2007. An increase of 11.8 percent from 2007 to2010 aer the global nancial crisis is higher than that of otherOECD countries. In 2010, the average debt-disposable incomerao of 25 OECD countries for which data was available was128.8 percent; in comparison, the average debt-disposableincome rao in the U.S. was 122.5 percent in 2010, the lowestsince 2003 and a 13.9 percentage point decline from its peak(136.4) in 2007.
6
The rao of household debt to GDP reached81 percent in 2010, higher than the OECD countries’ average of 73 percent.
7
A major consequence of Korea’s rising household debt is thedecline in household savings. Korea’s household savings ratedeclined signicantly aer the nancial crisis from over 20percent in the mid-1990s to a mere 2.7 percent in 2011. This isonly half of the average household savings rate of 5.3 percentamong the 23 OECD countries where data was available. For theU.S., in comparison, the average household savings ratewas 4.2 percent in 2011.
8
The sudden decline of Korea’s
household savings rate, which registers as one of the
lowest along with New Zealand (2.3 percent) and Japan(2.9 percent), is unprecedented in terms of the me periodof the overall drop in savings among the OECD countries.
9
 
The average household savings rate in Korea from 2000to 2010 was 4.7 percent, which is less than one-fourth of the average savings rate (19.8 percent) from 1990 to 1999.The savings rate in Korea especially plummeted aer twoperiods of economic distress: from 1998 to 2002 aer theAsian nancial crisis when the savings rate dropped from21.6 percent to 0.4 percent; from 2004 to 2008 aer thecredit card crisis, the savings rate declined from 8.4 percentto 5.8 percent.
10
From the macroeconomic view, the decline in savings ratecaused from the rise in household debt turns a virtuous cycleinto a vicious cycle among savings, investments and economic
growth. Therefore, the lack of sucient savings in an economywill retard economic growth in the future.
11
At the householdlevel, the decline in savings will exacerbate the household debtproblem and can create more credit defaulters and bankruptcies.The limited exisng evidence which foreshadows only the p of 
the magnitude of the problem also underscores the claim thatthe rising household debt, despite the government policies to
rein in the problem, remains one of the predominant risk factorsthat could threaten the stability of the Korean economy.
12
 
2. Trends of Korea’s Household Debt
There are two ways to dene household debt in Korea. First, if the household is the focus of analysis (as it is with this paper),the term for “household debt” is synonymous with “householdcredit” (
가계신용
), which is dened as the sum of householdloans and purchases on credit. Second, however, for crossnaonal comparison, the term for household debt is “individualnancial debt (
개인금융부채
),” which also includes debtincurred by the self-employed and non-prot organizaons inaddion to households, beer represents the household debtsince such stascs are prepared according to an accepted globalmethod (System of Naonal Account).
13
This paper uses the rstdenion of household debt (“household credit (
가계신용
)”) tobe consistent with other related studies.
14
 
Figure 1 shows that Korea’s household debt has risenconnuously since 2000, although the rate of increase variesfrom me to me, and has declined since 2010. The household
Figure 1: Trends of household debt in Korea
24.715.614.111.812.216.9
Year
12.61.32828.51.64.79.812.610.38.78.78.15.29.97.6Household Debt (trillion
won
)Household Debt growth rate (%)
   T   r   i    l    l   i   o   n 
    w    o    n
Nominal GDP growth rate (%)2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201212001000800600400200035302520151050-5-10-15
Source: Author’s creaon with data from the Bank of Korea, Household Credit Trends
 
-5.4
341.7464.7545.9607.1665.1843.2911.9963.8266.9
-11.3-10.4
   %
 
 ACADEMIC PAPER SERIES
3
debt problem in Korea has arisen as the result of the
interplay among many factors such as accommodavemonetary policy, lending pracces of nancial sectors,booming real estate market, and unmely policy responsesof the regulang authories. Other contribung factors
are decline of household savings due to the changes in
demographic structure and the expansion of real estateownership of baby boomers.
15
Aer the Asian nancialcrisis in the late 1990s, nancial instuons shied their
business focus from lending to companies to private and
household lending. Korea’s household debt since then hasgrown over 10 percent a year on average, much faster thanthe naon’s GDP growth rate.
16
Figure 1 shows that the average growth rate of household
debt from 2000 to 2012 is 12.1 percent, much higher thanthat of the nominal GDP at 7.6 percent during the sameperiod. The growth rates of the household debt were muchhigher from 2000 to 2002 exceeding 25 percent. Excludingthese years, the average growth rate of household debt (7.6percent) becomes much similar to the average growth rateof the nominal GDP (7.5 percent). The annual growth rates of household debt from 1997 to 1999 are 20.9 percent, -13 percentand 16.5 percent. Including these years, the average growth rateof household debt from 1997 (when the Asian nancial crisis hit)to 2012 is 11.3 percent.Although the growth rate of the household debt has declinedfrom 11.8 percent in 2006 to 5.2 percent in 2012 except in 2010,the amount of household debt has increased 58.7 percent during
the same period and reached a level that was described by the
current BOK Governor as a limit.Figure 2 shows the trends in the share of household debt todisposable income. The share has risen connuously from2004 and reached the record high level of 136 percent in2012. As shown in Figure 3, while the growth rate of personaldisposal income has been greater than that of CPI since 2000,the growth rate of household debt has exceeded that of personal disposable income since 2005, presenng evidence of households’ economic hardship.Despite the widespread concern over Korea’s household debt, itis also argued that major credit default is not on the horizon since
the debt is more concentrated in the high-income households as
shown in Figure 4, which depicts the shares of households with
debt, the volume of household debt, and the share of total debt
by income quinles in 2012.In Figure 4, the household debt was concentrated in the 5thquinle (top 20 percent) that has ability to service the debt.Eighty-one percent of the households in the 5th quinle havean average debt of 162.7 million
won
. On the other hand, 32.2percent of the households in the 1st quinle have an averagedebt of 30.5 million
won
. The 5th quinle’s share of total debtstands at 44.5 percent whereas that of the 1st quinle was muchlower at 3.7 percent. Based on this, some would argue that thehousehold debt problem in Korea sll is not at a serious level.
17
Nevertheless, the rise of household debt also aects overalldemand and consumpon. There are three ways through whichhousehold debt leads to changes in private consumpon.
19
 
First, consumpon may rise as the households have more
The Impact of Household Debt on Korea’s Economy and Society 
Figure 2: The share of household debt to disposable income
Year
Rate of increase in household debt (%)Household Debt / Disposable Income (%)
   %   %
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012140130120110100908070302520151050
Source: Stascs Korea
1.64.79.811.89.68.77.38.7Figure 3: Growth rates of CPI, personal disposable income and household debt
Year
CPI growth rate (%)Household debt growth rate (%)Personal Disposable Income growth rate (%)
   %
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012302520151050
Source: Stascs Korea, and Economic Stascs System of BOK 

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