South Korea's household debt problems are feared to worsen as the Federal Reserve's possible stimulus tapering is likely to spur foreign capital outflows, raising market rates, a report showed Monday.
If the U.S. central bank begins to taper its $85 billion in monthly bond purchases, foreign capital is likely to exit from the Korean market, raising concerns that subsequent rises in market rates would worsen household debt problems, Jeong Young-sik, an economist at the Samsung Economic Research Institute, said in the report.
The Fed surprised the financial market in September by announcing its decision to delay reducing the monetary stimulus program, raising uncertainty over the timing of the Fed's tapering.
The report came as cross-border foreign funds have been flowing into South Korea as the country has been largely unfazed by financial market jitters in some emerging nations due to its relatively strong economic fundamentals. Foreigners extended their net buying binge for a record 44th straight session on Wednesday.
Jeong said that if investors' appetite for safer assets increases, it will be difficult for South Korea to be seen as a safe haven anymore.
An increase in market interest rates will worsen debt-servicing burdens for debt-ridden Korean households and ailing sectors, including shipbuilders and shippers, it added.
It projected that if lending rates to households and companies rise by 1 percentage point respectively, households' burdens to repay interests are likely to rise by 11.1 trillion won ($10.5 billion) every year. For companies, such burdens are expected to increase by 14.5 trillion won.
The high indebtedness of households is the main bugbear for Korean policymakers as it is feared to crimp consumer spending, putting a damper on economic growth. Korea's household credit, credit purchase and borrowing from financial firms totaled 980 trillion won as of end-June. (Yonhap News)
