Bank of Korea Report on "Current Status and Implications of Corporate Debt in Our Country"
Recent years have seen a significant increase in corporate debt, primarily driven by a rise in real estate industry loans due to the overheating of the real estate market. It has been pointed out that orderly restructuring of real estate project financing (PF) loans, which carry high default risks, is necessary to improve the efficiency of resource allocation.
According to the 'BOK Issue Note: Current Status and Implications of Corporate Debt in Korea' report published by the Bank of Korea on the 20th, domestic corporate debt, which stood at 1,699 trillion won in 2017, increased by 1,036 trillion won to 2,734 trillion won by the end of last year. This represents an average annual growth rate of 8.3%, significantly exceeding the nominal growth rate of 3.4%.
The increase in corporate debt was led by private companies (89%) by entity, financial institution loans (78%) by type, and non-bank institutions (average annual growth rate +13.1%) by supplier.
Examining the background of corporate debt growth by sector, since the mid-2010s, the expansion of credit supply to the real estate sector, mainly by non-bank institutions, against the backdrop of a booming real estate market, has been a major factor driving the increase in corporate debt.
Additionally, ongoing financial support measures for individual business owners in response to the COVID-19 crisis also influenced the rise in domestic corporate debt. The annual increase in individual business owner loans expanded from an average of 24 trillion won (10% average annual growth rate) during 2017?2019 to 54 trillion won (15% growth rate) during 2020?2022, due to guarantee support and loan repayment deferrals for COVID-19-affected companies. The report expects that as support measures gradually normalize, related debt adjustments will be made progressively.
For general companies excluding real estate and individual business owners, debt growth accelerated after 2020 as both working capital and facility investment demands increased, mainly among large corporations, due to sluggish business conditions. However, this year, with improvements in the main industries' business conditions, the pace of debt increase is expected to gradually slow down.
From a risk perspective, the significant expansion of corporate debt in the relatively less productive real estate sector is assessed as a factor hindering the efficiency of resource allocation across the national economy.
It is also noted that the quality of corporate debt is somewhat deteriorating, as seen in the increasing proportion of debt held by marginal companies among general companies, which requires continued attention. The share of marginal companies' debt in total general corporate borrowing rose from 14.7% at the end of 2021 to 17.1% at the end of 2022.
The report emphasizes that future corporate debt management should focus on reducing related risks by sector rather than rigidly controlling total volume indicators.
Ryu Chang-hoon, head of the Market General Team at the Bank of Korea's Financial Market Department, stated, "It is necessary to promote gradual deleveraging in the real estate sector through orderly restructuring of PF loans with high default risks." He added, "Especially during the upcoming shift in domestic and international monetary policy stances, macroprudential policies should be appropriately implemented to prevent financial institutions' credit supply from concentrating excessively in the real estate sector."
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