<Household debt/GDP>
(Source: The Bank of Korea)
Recently, a new concern over the national economy’s structural issue has been raised, which is a notable problem in household debt. Problems of household debt have been continued since the financial crisis. As you may have noticed from the graph above, the ratio of household debt to GDP was continuously going up, which was at 87% in 2010. If the household debt isn’t efficiently managed, it will become an incubus on our economy. Not surprisingly, the relevant authorities, including the Bank of Korea, have been trying to figure out the appropriate response to household debt problems.
1. Efforts to respond to the household debt
The DTI (Debt to Income) regulation was reinforced in March 2011, which is based on the bond of sympathy developed between the government authorities. DTI is the percentage of the annual debt repayments proportionate to consumer’s monthly gross income. FSC took a proactive approach to deal with household debt issues. They provided comprehensive countermeasures for the Micro-credit and a framework for the efficient management on household debt through ‘soft landing’ comprehensive measures. There are 4 measures suggested to manage the household debt.
1) Management of the total liabilities.
2) Improvement of ability to repay the debt through the job creation.
3) Reinforcement of financial soundness.
4) Strengthening Micro-credit.
2. Evaluations
The rate of increase in household debt has been slowing down, as a result of the efforts by the financial authorities. However, there are still a number of concerning factors to be addressed regarding the management of household debt. The self-employed people, namely entrepreneurs, have relatively high ratio of debt to their income, compared to other regular employees. Also, low-income earners do not have sufficient disposable income for potential expenditure during economic downturn. The other concern is that baby boomers face tight burdens of debt payment after their retirement. Comprehensive and strategic planning on the basis of careful analysis is in urgent need for these problems. FSC should primarily focus on managing specific and microscopic sectors and strengthening household debt’s financial soundness.
The chairman of FSC, Seok-dong Kim, passed the following request at the executive meeting in June. He urged that the FSC should actively cooperate with government ministries in order to make a good foundation for the Macro-economic condition. This is because it is difficult to respond to the microscopic sectors without help from the government authorities such as the Bank of Korea. He suggested that the T/F should be reorganized to operate flexibly in support of household debt. Also, the macroeconomic conditions, such as management of the total liabilities and job creation, should be backed up to provide a real solution to the fundamental household debt problems.
Dohee Im (ddoohee@naver.com)
Filed under: FIN_ancial POL_icy in Korea
