S. Korea’s private-sector debt doubles nominal GDP by March amid COVID19 havoc

2020.06.24 14:34:19

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South Korea’s private-sector debt has come to double the nominal gross domestic product (GDP) by the end of March as household and corporate debt surged since the outbreak of the coronavrius, according to data compiling by the Bank of Korea.

Household debt reached 1,611 trillion won ($1.3 trillion) as of end of March, up 4.6 percent from the same period a year ago. The gain was mainly led by a 5.7 percent increase in mortgage-backed loans. The ratio against disposable asset reached historic high of 163.1 percent by March, up from 158.6 percent three months ago.

“Debt servicing capacity by households could further deteriorate going forward as conditions have worsened from the spread of COVID-19,” the BOK said in the report.

Corporate loans stood at 1,229 trillion won, rising 11.6 percent during the same period, data showed.

The country’s private credit debt against nominal GDP reached 201.1 percent at the end of the first quarter, up 12.3 percentage points from the same period a year ago. It is the first time the ratio reached over 200 percent.

The BOK said that banks remain sound despite borrowing expansion.

Data showed that lenders’ non-performing loan ratio reached 0.46 percent as of end of the first quarter, down 0.09 percentage point from the same period last year. Total capital ratio was lower than last year at 15.3 percent based on Basel III standard, but banks are under control, BOK noted.

The central bank also said that the country’s financial system will be able to remain stable throughout given various measures and recovery capacity of financial institutions.

The BOK advised that policymakers should ready preemptive countermeasures to prevent systematic risks such as weakened financial intermediation due to large-scale losses of financial institutions.

The BOK plans to enhance real-time monitoring of risk at home and abroad and play aggressive role in the advent of serious credit crunch.

The central bank projected Korean companies would be 54 trillion won liquidty-short if the economic fallout from the coronavirus crisis prolongs throughout the year.

The airline industry will be hit hardest with credit shortfall reaching 12.7 trillion won. The BOK expected financial soundness to worsen with half of the air carriers not being able to cover interest payment with this year’s profit.

Under the worst-case scenario, companies in accommodation and food sector, leisure service, and shipping industry will also suffer from liquidity shortage.

The BOK expected companies to be in need of up to 30.9 trillion won under milder scenario where coronavirus fallouts last until the second quarter of this year.

A 10 percentage point increase in refunding rate based on policy efforts to stabilize financial market would reduce overall cash shortage to 37.8 trillion won under serious scenario and 20.6 trillion won under milder one.

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The BOK also worried worsening corporate health.

Under worst scenario, companies’ operating profit to sales ratio would fall from 4.8 percent in 2019 to 1.6 percent this year and under milder scenario from 4.8 percent to 2.2 percent. Their interest coverage ratio would also fall to 1.1 times and 1.5 times in respective scenario, down from 3.7 times in 2019.

About half of the companies would fall under 1 in interest coverage ratio, meaning that they cannot even to afford to pay interest with earnings. Last year, 34.1 percent of the companies fell under 1 category.

The BOK noted that current corporate cash shortage isn’t related to structural issues but is temporary stemming from COVID-19 shock. It underscored the need of preventing large-scale insolvency through funding support, particularly in vulnerable industries, by enhancing monitoring on cash conditions and stabilizing commercial paper and corporate bond markets.

By Lee Eun-joo

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]