Bank for International Settlements (BIS) Report Claims "Household Debt Restricts Economic Growth"
"Private Credit Above Certain Level Hinders Growth"
"Growth Rate Declines When Ratio Exceeds 100% of GDP"... South Korea at 222.7%
An international organization has issued a warning that household debt, which has grown too large relative to economic capacity, is weighing down South Korea's economic growth.
According to a report by the Bank for International Settlements (BIS) on the 11th, while debt used to promote growth in the past, it has now entered a phase where its negative effects outweigh the positive ones.
BIS pointed out that since the early 2000s, a prolonged low-interest-rate environment has led to a significant expansion of private credit in most emerging countries. Private credit refers to debt in the private non-financial sector, including corporations and households, excluding financial institutions.
In emerging Asian countries excluding China, the ratio of private credit to Gross Domestic Product (GDP) has increased by more than 1.3 times since 2000. As debt increases, access to financing improves, and investments in real assets or education expand, contributing to growth.
However, when debt exceeds a certain level, it transforms into an inverted U-shaped relationship that hinders growth. For example, increasing consumption through borrowing may boost growth rates in the short term, but in the medium to long term, the burden of debt repayment and interest payments can weaken future growth potential.
BIS analyzed that "most emerging countries are still in the range where private credit growth promotes growth, but Asian countries have reached an inflection point where it begins to hinder growth."
In particular, it warned that "in the cases of South Korea and China, the ratio of private credit to GDP has exceeded the 100% mark, and economic growth rates have peaked, consistent with an inverted U-shaped curve."
South Korea's private credit to GDP ratio reached 222.7% at the end of last year (according to BIS). Of this, household debt accounted for 100.5%, and corporate debt for 122.3%.
BIS also noted the phenomenon of credit shifting to construction and real estate sectors as household debt increases and housing demand rises.
Since the productivity of the construction and real estate sectors is relatively low, excessive lending concentration in these industries could pose another burden on economic growth. Countries where the share of loans to construction and real estate increased more experienced greater declines in total factor productivity and labor productivity.
This warning from BIS is interpreted as providing implications for South Korea, where concerns about financial stability are growing due to recent housing price increases and a surge in household debt.
The Bank of Korea pointed out that the rapid increase in household debt triggered by rising housing prices in the Seoul metropolitan area undermines the stability of the financial system and is not conducive to healthy economic development.
According to the minutes of the Monetary Policy Committee meeting held on August 22, released by the Bank of Korea the previous day, committee members expressed serious concerns about the increase in household debt.
One committee member said, "Recently, the housing market in the Seoul metropolitan area has shown signs of overheating, and the pace of household loan growth has also expanded, increasing the gap from fundamentals such as income. If housing prices or household debt deviate from fundamentals, the adjustment process in the future could increase financial and economic volatility and structurally constrain consumption and growth."
Another member emphasized, "The rise in real estate prices in some areas not only increases household debt but also deepens asset inequality and could impair the efficiency of resource allocation in the long term."
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