SEOUL: South Korea’s central bank said the fiscal health of the country’s household sector has worsened slightly as debt growth outpaced income growth in the second half of the year. The Bank of Korea said in a biannual report on financial stability that household debt had increased substantially on continued activity in the housing market.
“Household income growth has lagged debt growth due to the country’s economic expansion being unable to back (income),” said Hur Jae-sung, a deputy governor at the central bank in a press conference. The Bank of Korea currently sees 2015 gross domestic growth (GDP) growth at 2.7%, which would be the weakest since 2012.
“Amid this situation, if macroeconomic shocks occur including sudden interest rate increases, there is a chance insolvent households may surface centred around small-scale businesses,” the report said. “There is a need to continuously be wary of households’financial stability.”
Underlying dangers in the financial system have increased due to the worsening of households’ balance sheets, the report said, but denied the economy faces a risk of households defaulting anytime soon.
The central bank’s report came a day after it released the results of a survey on household income, which showed South Korean households spent more of their disposable income on repaying debt in 2014 than in the previous year.
Separately, the report also called for pre-emptive measures to address the ageing workforce, as the country has one of the fastest ageing populations in the world. The report pointed out South Koreans had a tendency to cut down on their debt shortly after retirement, around age 58, by selling real assets such as real estate.
If the deleveraging pace quickens and the real estate market is unable to cope with the extra supply, some elderly households may be unable to pay back their debt. Although household debt in relation to the ageing population does not pose an imminent risk, pre-emptive measures such as new job creation for the elderly should be taken to prevent shocks, said the central bank.
