[The Editors' Verdict] Making the New Year the Inaugural Year of Debt Deleveraging

We are about ten days away from the New Year. Looking back, although the tiresome COVID-19 pandemic ended early this year, the economy was weighed down throughout by the effects of high interest rates, and financial market instability persisted.

When the funding market tightened due to the Legoland incident at the end of last year, the government prioritized stabilizing the market. Due to concerns over real estate project financing (PF) loan defaults and unsold inventory backlogs, measures such as the 'Special Bogeumjari Loan Supply' in January and the 'Normalization of Real Estate Loan Regulations' in March were implemented to support the real estate market. Consequently, household loans inevitably continued to increase.

Economic recovery also did not meet expectations. The positive effects on our economy from China's lifting of COVID-19 lockdowns were minimal, and the semiconductor industry did not revive as hoped. Consumption also did not recover significantly. The government is implementing soft-landing support measures, such as extending loan maturities by three years (until September 2025), for small business owners and self-employed individuals who were hit hard by COVID-19.

From the end of last year through this year, the situation was focused on immediate firefighting. Despite rapid interest rate hikes and sustained high rates, debt deleveraging (reduction) did not occur at all.

Having temporarily put out the urgent fires with stopgap measures, it is now time to properly execute debt restructuring. The current stopgap measures cannot be extended for another year. Debt continues to accumulate, which inevitably burdens households, the self-employed, and the real estate industry.

Financial Supervisory Service Governor Lee Bok-hyun stated on the 12th that “there is a fundamental principle to make appropriate adjustments and reorganizations according to market principles for construction companies, financial firms, and others with questionable business viability or financial sustainability.” This is for the reasons mentioned above.

As of the end of August this year, the government announced in September that out of 187 cases subject to the 'PF Lender Agreement,' 152 were undergoing normalization and soft landing. At that time, 23 cases were rejected, and 12 were under review. Given the prolonged high interest rates and the stagnant real estate market, a more precise evaluation is necessary. Some securities firms should be made to realize losses, and if construction companies become insolvent, proper restructuring through workouts (financial restructuring processes) must be carried out.

For small business owners and the self-employed, careful consideration and credit evaluations based on a realistic understanding of the situation are needed. When maturity extensions and other measures were announced again in September last year, one rationale was that “COVID-19 is not yet over, and if their credit is evaluated under current conditions, many would be deemed unloanable. Proper credit evaluation can only be done once COVID-19 ends and sales normalize, so it is better to give them a chance to normalize rather than forcing closures now.” Now, nearly a year has passed since COVID-19 ended. Some businesses have normalized sales, while others have not. Instead of blindly extending maturities until 2025, realistic exit strategies such as debt restructuring must be established.

Household debt should no longer be used to prop up the real estate market. Although some still view the housing market positively, the perception that house prices will hardly rise further is spreading. According to the Financial Supervisory Service, total household loans across all financial sectors decreased for seven consecutive months from September 2022 to March 2023 but have increased for eight consecutive months from April to November 2023. We must return to the situation of late last year and early this year.

Although the U.S. is expected to cut its benchmark interest rate next year, it is projected to reduce it by only 0.75 percentage points over three cuts annually. At best, the rate will fall from the current 5.25% to 4.5% by the end of next year. The Bank of Korea, frankly, should have raised rates further considering inflation, but it refrained from significant hikes due to economic burdens. After raising the rate by 0.25 percentage points to 3.5% in January this year, it has kept it steady through November. Therefore, even if the U.S. lowers its benchmark rate, the Bank of Korea’s rate cuts will be smaller. Both the U.S. and Korea are likely to maintain high benchmark rates in the 4% and 3% ranges.

If high interest rates persist, excessive debt will limit consumption and investment capacity, acting as a factor for low growth. Fortunately, next year’s growth rate is expected to slightly exceed our economy’s potential growth rate (around 2%). Since the economy is not expected to sharply decline, we should not be swayed by short-term fluctuations but pursue solid deleveraging. Although it may be difficult now, deleveraging debt will help expand growth potential in the long term. The New Year must be the inaugural year of deleveraging.