IMF warns of Korea’s household debt

Korea’s fast-growing household debt increases potential threats for a credit cut and repercussions from future rate hikes, economists of the International Monetary Fund said Friday.

In the aftermath of the global financial crisis, the steep increase in household and corporate debt in the Asian private sectors accelerated growth, but with potential aftereffects.

“If the debt keeps going up, it can become a major risk for the Asian economies, which calls for (government) interventions to downsize the size of internal credit risk vulnerabilities,” Bank of Korea said in a press release, citing Ding Ding, the senior economist of IMF’s Asia and Pacific department, in a Bank of Korea-IMF forum in central Seoul.

In his presentation “Debt and Leverage in Asia: Stylize Facts and New Risks,” Ding said Korea’s household debt has the potential to make Asia’s fourth-largest economy become exposed to the central bank’s future key rate hike, although household balance sheets may seem manageable at the moment.

For plausible government measures to curb household debt, the IMF economist advised that government should seek macroeconomic policies to keep down vulnerabilities from household credit.

Ding’s stances comes in line with BOK Gov. Lee Ju-yeol’s comments a day earlier. Although Korean financial authorities have shown confidence that the country’s household debt is “manageable,” the BOK chief said “comprehensive household debt control policies need speedy implementation.” BOK, the Finance Ministry and other ministries will announce a set of household debt-control measures next week.

Regarding balancing between growth and credit risk management -- the bone of contentions for Asian policymakers -- the Finance Ministry vice minister presented some of Korean government’s expansionary policies, such as fiscal stimulus packages, individual consumption tax cuts and controversial “Korea Black Friday Sales,” at the BOK-IMF forum. The government also encouraged household borrowers to transfer to fixed-rate, amortizing loans from the then-dominant floating rate loans.

Meanwhile, Siddharth Tiwari, the director of IMF’s strategy, policy and review department, picked excessively high leverage in Asian private sectors as a serious threat that can spread to the public sectors as well.

In the wake of the U.S. quantitative easing move, leverage grew fast in the Asian emerging economies due to massive inflow of foreign capital.

“The rise in dollar debt of Asian countries can be potential vulnerability, in the case of the future U.S. rate hike and strengthening greenback,” Tiwari said.

By Chung Joo-won (joowonc@heraldcorp.com)