In less than twenty years, South Korea has gone from being a nation of savers to one of the most reckless borrowers in the world. On both government and household levels, South Korea is deep in debt and a crisis could be brewing in the world’s 13th largest economy.
The numbers don’t paint a pretty picture. According to a recent report by the LG Economic Research Institute, 28 percent of South Korean households are unable to make payments on their debts each month and can’t cover their monthly expenses with their current income.
South Korea has a household debt to income ratio of 155 percent.** As of the end of July, household debt totaled 647.2 trillion won (US$573.25 billion), according to the Bank of Korea.
And that debt is costly. According to a report by Statistics Korea, low-income households are paying more in interest than ever before, with the average interest monthly payment standing at 36,219 won (US$32), 13.6 higher than the year before.
It isn’t just private citizens that are in debt: as of the end of 2011, central and local government debt stood at 420.7 trillion won, according to the Ministry of Finance Central government debt was up 28.5 trillion won (US$25 billion) from the previous year. This is ironic for an administration that ran for office on a conservative, small government platform.
The Lee’s government’s aggressive spending can be partially attributed to the pressures of the 2008 global economic crisis. In times of crisis, inaction by politicians is unacceptable to South Korea’s energetic citizenry and a stimulus package of 6.1 percent of GDP was passed, the largest among OECD countries.
The Lee government’s actions in 2008 helped South Korea minimize damage of the global crash, but as of now, the medium-term outlook for the national economy isn’t great. An August 19 Federation of Korean Industries poll of 43 economic experts found 74.4 percent of respondents saying that said there is a high chance that South Korea could enter a prolonged economic slump.
In July, both the Bank of Korea and the Finance Ministry trimmed back their predicted rates of growth from 3.5 to 3 percent and to 3.3 percent from 3.7 percent, respectively.