South Korea's move to tighten lending rules to curb ballooning household debt will likely improve its long-term financial stability, but it may drag down next year's growth by denting private consumption, Moody's Investors Service said Tuesday.
The government last week announced a set of measures to manage the nation's rapidly rising household debt, prodding banks to extend fixed-rate, amortized loans and adopt tougher screening rules on borrowers starting from the latter half of 2016.
The latest measure came as household debt has surged rapidly, particularly mortgages, after the Bank of Korea cut its interest rate four times, starting last July, to a record low of 1.5 percent to shore up Asia's fourth-largest economy.
Moody's said the measures will help manage the private debt level in the long term, but the switch to fixed-rate, amortized mortgages and higher barriers for loans will contract domestic consumption.
"Such steps have a positive long-term effect on financial stability, and ultimately will help free up resources for consumption, supporting economic expansion and bolstering the sovereign credit profile," Moody's said in a report.
"But increased restrictions on mortgage lending will pose downside risks to real GDP growth in 2016, when the new measures take effect."
The Financial Services Commission, the top financial regulator, said the debt management plan is aimed at making 45 percent of all home loans into amortizing loans by 2017, up from 26.5 percent in 2014.
Under the new structure, borrowers will have to make principal payments toward fixed-rate mortgages. Interest-only bullet loans merely require payments until the end of the loan term.
"The overall sum to be repaid is likely to be lower under the new structure, alleviating potential longer-term risks to household financial stability," the ratings agency said. "However, the temporal distribution of the payments will place additional downward pressure on consumption and GDP growth in the near term, at a time of already weak domestic demand."
The real gross domestic product edged up 2.2 percent on-year in the second quarter as both domestic consumption and exports have remained sluggish since early last year, it noted. Private consumption constitutes around half of nominal GDP.
Moody's has slashed South Korea's real GDP growth target to 2.7 percent this year and 3 percent next year, citing weak demand from the slower global growth and dampened domestic consumption stemming from the outbreak of Middle East Respiratory Syndrome in the second quarter. (Yonhap)
