Highly leveraged Korea vulnerable to U.S. rate hike

By Choi Sung-jin

Korea's household debt level is the highest among 18 emerging economies when measured against its GDP. This, coupled with the fourth-highest corporate debt ratio measured against the same economies, will sharply increase its risks when the U.S. Federal Reserve raises its interest rate, foreign analysts said. 

According to the Institute of International Finance (IIF), Korea's household debt-GDP ratio reached 84 percent in the first quarter of this year. The rate hovers above the 74 percent average of advanced economies, and is more than double that of the 40 percent average among Asia's emerging economies. 

Outstanding credit to households, the most widely used gauge of family debt, topped 1,130 trillion won ($970 billion) in the second quarter owing to a sharp increase of mortgages, the Bank of Korea said. 

Particularly dangerous was the ratio of household debt against disposable income, which shot to 165 percent here, the Washington, D.C.-based IIF said. Korea's per-person household debt amounts to $30,000, the third highest following only the city-states of Hong Kong ($43,000) and Singapore ($32,000). At the end of 2014, about 1.12 million Korean households, or 10 percent of the total, were at risk of delinquency. 

Korea's corporate debt ratio, which stands at 106 percent of the GDP, also far exceeds the 90 percent average among advanced countries, and was fourth highest following Hong Kong, China and Singapore. Given that the U.S. interest rate hike is taken almost for granted, any further debt burden on domestic businesses could significantly increase financial risks in Korea. 

Among the 18 emerging economies, Korea has the largest amount of dollar-denominated debt repayable next year with $21 billion, followed by $9 billion each for China and Brazil, and $7 billion for Mexico. Korea's government debt against GDP also jumped to 41 percent in the first quarter compared with 24 percent before 2008, the steepest rise after only the South African Republic, which saw a comparable ratio surge from 32 percent to 55 percent over the same period. Korea's total debt ― government, corporate and household ― was 317 percent of its GDP in the Jan.-March quarter.