South Korea could suffer from a debt crisis if the country fails to manage surging debt in the private sector, a state-run tax and economic policy research institute warned.

According to a report released by Korea Institute of Public Finance (KIPF) on Monday, it is hardly the case at the current stage that Korea would face an economic crisis due to a high level of government debt, but the country could go into a debt crisis because of rapidly rising debts in the country’s private sector in the advent of events that negatively affect the economy.

The KIPF’s latest report stated that Korea’s corporate debt level stood at 101.7 percent against the country’s gross domestic product (GDP) as of last year, higher than 94 percent, the average corporate debt level of major economies compiled by the Bank for International Settlements (BIS).

The number of Korean companies with an interest coverage ratio of under 1 accounted for 35.7 percent of the total last year, up from 32.6 percent in 2014. A company with the ratio below 1 is not capable of paying interest expenses with its operation income.

The ratio for large conglomerates fell from 28.5 percent to 24.5 percent during the cited period but for small- and mid-size companies up from 38.2 percent to 47.2 percent.

The country’s household debts are also rapidly increasing.

According to the Organization for Economic Cooperation and Development (OECD), the ratio of Korea’s household debts as to disposable income stood at 186 percent in 2017, higher than major advanced economies including the United States (109 percent), Japan (107 percent), and Germany (95 percent). The report also showed that loan default rate of self-employed businesses has picked up this year after years of declining.

Korea’s household debts reached 1,540 trillion won ($1.3 trillion) in the first quarter ended March this year, rising much faster than the country’s real GDP growth, the report noted. Korea’s household debts against its GDP reached 74.2 percent in 2008, lower than 95.9 percent of U.S. household debt level during the subprime crisis. Korean household debt level, however, jumped 15.4 percentage points to 97.7 percent in 2018, which is much higher than that of the U.S. household debt level during the financial crisis a decade ago, according to the report.

The KIPF warned in the report that Korea would be hit by a similar degree of the debt crisis that swept across European countries in 2010 if any adverse economic conditions force private companies and households with excessive debts into insolvency.

This means that surging debt in the private sector could lead the public sector to inject funds to bail out debt-stricken private companies and financial institutions that could be forced to go into liquidity crunch due to snowballing household debts.

The report called for the Korean government to not only monitor public debt level to check fiscal soundness but also private sector debts to manage overall economic health.

By Lee Ji-yong and Lee Eun-joo

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