S.Korea central bank sees worsening financial stability woes, debt repayment burden to rise

FILE PHOTO: A woman wearing a plastic glove holds money as she stands in a queue to buy face masks at a post office, after a shortage of masks amid the rise in confirmed cases of the novel coronavirus disease COVID-19, in Daegu, South Korea, March 4, 2020. REUTERS/Kim Kyung-Hoon

SEOUL (Reuters) – South Korea’s central bank warned on Thursday that the debt repayment burden among vulnerable households could increase sharply as interest rates rise, underlining the growing negative impact of the debt binge in Asia’s fourth largest economy.

Debt-to-disposable income at South Korean households was at 172.4% in the second quarter, up 10.1 percentage point from a year earlier, the BOK said in a regular report on financial stability.

The bank said the increase was a concern as household income for many dwindle amid social distancing curbs in place to fight COVID-19.

South Korea has put in place curbs including limited operating hours for cafes and restaurants and on the number of people allowed at social gatherings, hurting those in the hospitality sector.

“Funds concentrated into the asset market, as well as rapid home price increases, could bode ill for financial stability when market sentiment of economic entities rapidly change due to internal or external shocks,” the report said.

The Bank of Korea raised its policy rate by 25 basis points to 0.75% in August, the first hike in almost three years and the first major Asian central bank to shift away from pandemic-era monetary stimulus.

Koreans have been borrowing more than ever before, and policymakers are increasingly worried the debt pile could become unsustainable as rates rise, hurting people’s purchasing power and long-term growth.

Still, the report also said an additional 25-basis-point rate increase should only have a limited interest repayment impact on both households and businesses.

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