S. Korean household debt repayment ability weakens in 2009

(ATTN: UPDATES with more info from para 12)
SEOUL, April 29 (Yonhap) -- South Korean households' ability to repay debt
worsened in 2009 on rising home-backed loans, the central bank said Thursday,
stressing the need to maintain loan controls and improve job markets to stem
excessive debt growth.
The ratio of households' financial debt to disposable income rose to 1.43 in
2009, compared with 1.39 at the end of 2008, the Bank of Korea (BOK) said in its
semi-annual financial stability report.
The figure has been on an upward trend since 2004, when it stood at 1.14,
according to the central bank. Household debt reached 854.8 trillion won (US$766
billion) as of end-2009, up 6.5 percent from a year earlier.
"Given that households' financial debt is rising, mainly due to home-backed
lending, there is the need to keep regulatory loan controls at an appropriate
level to curb the growth of household debt," the report said.
The report comes at a critical time, with debate heating up over when to raise
the key borrowing rate.
BOK Gov. Kim Choong-soo has said that a microeconomic approach, such as loan
controls, is more preferable in tackling rising household debt as a rate increase
would have far-reaching impacts. His comment raises speculation that the key rate
is likely to remain at a record-low of 2 percent for some time.
Low borrowing costs and expectations for rising house prices have prompted more
people to take out mortgage loans, leading the financial watchdog to put
regulatory loan controls in place last year.
The BOK said that households' ability to repay debt is not likely to sharply
weaken down the road as the economy is picking up and job market conditions are
expected to improve. But it warned that if the growth of household debt continues
to pick up, it could dent economic stability and growth potential by shrinking
consumer spending and savings rates.
In the report, the BOK said upward pressure on housing prices is expected to be
limited.
"Although ample liquidity and the economic recovery could put upward pressure on
home prices, the pace of the upward movement is expected to be limited amid
tighter regulatory loan controls and mounting unsold homes," the report said.
The BOK froze the benchmark seven-day repo rate for the 14th straight month in
April. It cut the rate by a total of 3.25 percentage points between October 2008
and February 2009 in a bid to bolster the slowing economy.
The central bank said it is necessary to watch for possible side effects that the
accommodative steps taken in the global financial turmoil could bring over the
mid- and long-term.
The BOK said the key rate should be adjusted at an appropriate pace and with a
proper margin by taking into account global discussions surrounding exit
strategies, as well as economic and financial conditions at home and abroad.
Meanwhile, the central bank also suggested crafting various measures to curb
excessive short-term borrowing if necessary.
Korean banks, saddled with high short-term borrowing, suffered from a severe
liquidity squeeze in late 2008, hit by the U.S.-sparked global financial crisis,
fueling concerns they may face difficulty in servicing their debt.
"Given continued in- and out-flow of foreign capital for betting on short-term
profits, there is the need to come up with various measures to curb excessive in-
and out-flow of such funds under the framework of international coordination,"
the BOK noted.
sooyeon@yna.co.kr
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