The South Korean economy is currently facing significant challenges as the burden of debt across households, businesses, and the government continues to grow. Recent data released by the Ministry of Strategy and Finance, along with the Bank of Korea, reveals that the total combined debt in the nation reached a staggering 5,800 trillion won by the end of November 2024. This figure is alarming as it exceeds the country’s gross domestic product (GDP) by more than double, with projections indicating that the total debt may approach 6,000 trillion won by the close of the year.
Corporate debt in particular has surged to an unprecedented level, exacerbated by a prevailing high-interest rate environment that has resulted in a liquidity crisis for many marginal companies. As businesses struggle to manage their debts, households are also feeling the pinch. With high prices and rising interest rates, consumer spending has slowed significantly, leading to a decline in domestic demand.
At the end of last year, corporate debt stood at 2,734 trillion won, representing a staggering 122.3% of the nation’s GDP. This increase is particularly notable compared to 2019, when corporate debt was just 101.3% of GDP. The COVID-19 pandemic played a crucial role in this escalation, as many companies sought financial support to navigate the economic downturn. The demand for operating funds from larger corporations and investment for facilities surged during this period, leading to a significant increase in debt levels.
However, the rise in corporate debt has not occurred in isolation. Since 2022, interest rates have climbed sharply, putting additional pressure on businesses struggling to manage their finances. This situation has left many companies, including those among the largest in the KOSPI market capitalization, unable to formulate management plans for the upcoming year. The inability to cover interest on corporate bonds has raised concerns about the sustainability of their operations.
On the household front, debt levels had shown some signs of stabilization but have recently started to rise again in the wake of persistent high-interest rates. As of the end of the third quarter, household credit reached 1,913.8 trillion won. A majority of this debt is tied up in mortgage loans, which, while not immediately threatening the financial system, have diminished the amount of disposable income available to households. This decline in disposable income is further compounded by the high-interest burdens, ultimately stifling domestic consumption.
Data from the National Statistical Office indicates that the retail sales index, a key indicator of household consumption, has experienced a decline for ten consecutive quarters, marking the longest period of decline on record. This trend reflects a broader economic malaise that is affecting consumer confidence and spending habits.
According to Woo Seok-jin, an economics professor at Myongji University, the current economic dynamics in South Korea present a unique challenge. “Typically, households save money, and companies borrow to invest. However, in Korea, the opposite is occurring, with households borrowing heavily instead,” he noted. This inversion of the usual economic behavior suggests that consumption will inevitably contract as the financial pressures on households intensify.
The implications of this growing debt crisis are far-reaching. With both corporate and household debts at record levels, the potential for an economic slowdown looms large. Policymakers are faced with the difficult task of balancing fiscal stimulus efforts while managing the burgeoning debt levels that threaten to undermine economic stability.
As the government grapples with these challenges, the need for strategic economic measures becomes increasingly urgent. Without timely interventions, the risk of a deeper economic crisis could escalate, affecting not just businesses and households, but the overall economic landscape of South Korea.
In summary, the current debt situation in South Korea underscores a precarious balance that could tip the economy into a more severe downturn. Stakeholders across the board are closely monitoring these developments, as the ramifications of this debt burden will be felt for years to come.
