S. Korea’s private sector debt ratio vs GDP third highest among 43 nations: BIS

South Korea’s private-sector debt versus its economy has reached third highest among 43 countries as of September last year, according to the Bank for International Settlements (BIS) publication.

South Korea’s credit to the gross domestic product (GDP) gap reached 18.9 percent as of the third quarter, far passing the 10 percent threshold requiring buffer action as two thirds of past banking crises were preceded when the gaps hovered above the level.

The credit-to-GDP gap is considered useful early-warning indicator of a banking crisis at horizons of two to five years. Only Japan at 24.4 percent and Thailand at 21.9 percent show bigger gap than South Korea.

The ratio of household debt versus GDP exceeded 100 percent first time in the third quarter in 2020 and hit 106.7 percent as of the third quarter last year, highest after Switzerland (131%), Australia (119.3%), and Canada (108.8%).

A surge in real estate prices drove up the household debt. Last year, housing prices rose 9.93 percent, according to the Korea Real Estate Board. The figure was the second-highest after 11.58 percent in 2006.

Panicky buying before prices went further up fanned leveraged investment.

According to data released by five major banks, including KB, Shinhan, Hana, Woori, and NH, the balance of mortgage loans at the end of last year recorded 505.4 trillion won ($416 billion), up 6.7 percent from a year ago.

Loans to self-employed also jumped from protracted Covid-19 crisis. Loans to self-employed reached 831.8 trillion won as of the first quarter last year, up 18.8 percent from a year ago.

Corporate loans also increased sharply amid lush liquidity. Their debt-to-GDP ratio stood at 113.7 percent, taking 16th place among 48 countries. The share gained 19.4 percentage points from 2016, marking the seventh fastest in the BIS scale.

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