Bank of Korea, Financial Stability Report
[Asia Economy Reporter Seo So-jeong] Due to the US monetary tightening and the Legoland incident, South Korea's Financial Stress Index (FSI) has recently entered the 'crisis' stage.
According to the 'Financial Stability Report' released by the Bank of Korea on the 22nd, the Financial Stress Index (FSI), calculated based on real and financial indicators affecting financial stability, rose to 23.6 in October before slightly dropping to 23.0 last month.
The FSI index rose continuously for seven months from January (5.9) through March (8.6) to September (19.7) in the 'caution' stage (8 or above but below 22), then entered the 'risk' stage (22 or above) in October, and remained in the risk stage in November.
Regarding the Financial Vulnerability Index (FVI), which comprehensively reflects financial imbalance situations and financial institutions' resilience, it decreased from 47.4 in Q2 to 44.9 in Q3. The Bank of Korea explained, "The accumulated financial imbalances have been reduced, and thanks to the sound resilience of the financial sector, it has steadily declined since the second half of last year."
The Bank of Korea stated, "In the second half of this year, South Korea's financial system showed somewhat unstable signs in some financial markets due to increased domestic and international uncertainties," adding, "Going forward, factors such as the strengthening of major countries' monetary tightening policies, the high level of household debt domestically, increased real estate financing after COVID-19, and the weakening resilience of non-bank financial institutions may act as sources of instability."
At the end of Q3, the ratio of private credit (sum of household and corporate debt in the fund circulation statistics) to nominal Gross Domestic Product (GDP) was 223.7%, up 1.4 percentage points from 222.3% in Q2, setting a new record high. The ratio of household credit to GDP fell to 105.2% in Q3 from 105.7% in the previous quarter due to the impact of interest rate hikes. The ratio of household debt to disposable income was 166.1%, down from 167.7% in the previous quarter as the household debt growth rate slowed compared to income growth.
However, the ratio of corporate credit to GDP surged from 116.6% to 118.5%. At the end of Q3, corporate loans amounted to 1,722.9 trillion won, a 15% increase year-on-year due to worsening conditions for corporate bond and commercial paper (CP) issuance amid expanded capital market uncertainties, increased funding demand caused by rising exchange rates and raw material prices.
The corporate debt ratio rose to 83.1% at the end of Q2, up from 80.1% at the end of last year, mainly among large corporations, while the interest coverage ratio (operating profit/total interest expenses, based on the first half of the year) fell to 7.7 times from 8.9 times last year.
Lee Jung-wook, Director of the Financial Stability Department at the Bank of Korea, said, "With Korea Electric Power Corporation bonds and bank bonds replacing corporate bonds in the bond market, corporate loans have concentrated in banks. Due to the rise in international raw material prices, companies' working capital has increased, and construction companies have a high debt dependency, so when interest rates rise, the principal and interest repayment costs increase, leading to an increase in corporate loans." He added, "The increase in corporate loans as a response to rising costs such as working capital demand is a matter that should be carefully monitored from the perspective of financial stability."
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