Rising rates pose big risk to economy

Rising rates pose big risk to economy

The record-high household debt is emerging as the biggest risk for the nation’s economy as interest rates are rising ahead of the U.S. Federal Reserve’s move to raise its policy rate this month.

Some analysts say a larger part of the household debt which is expected to top 1,300 trillion won this year could turn sour if money market rates continue to rise.

The increasing risk of defaults on household debts and correction of the overheated real estate market are coming at a bad time when consumers and companies are spending less, exports are weakening and policymakers are hamstrung by the presidential scandal, analysts said.

This means rising rate hikes could take an enormous toll on the economy which is already reeling under the snowballing presidential scandal on top of weakening investment and consumption.

In this climate, some observers liken the current situation to 1997 when Asia’s fourth-largest economy experienced a major financial crisis.

For example, the factory operation rate fell to 70. 3 percent last month, which Statistics Korea reported is similar to the level of the late 1990s.

This would negatively affect the job market — the Korea Labor Institute recently projected the unemployment rate would jump to 3.9 percent next year, the highest in 15 years.

“Ahead of the Asian financial crisis, the snowballing trade deficit was the top source of worries and now the ever-increasing household debt is the root cause of the headache,” Prof. Lee Phil-sang at Seoul National University said.

“If interest rates go up or apartment prices go down, the debt would deal a serious blow to the economy.”

Household debt is predicted to swell to 1,500 trillion won next year, approaching the value of the country’s GDP. In other words, the country is required to spend all of its annual added value to pay out household debt.

Following Donald Trump’s surprise victory in the U.S. presidential election this month, the expected inflationary pressures are pushing global interest rates and Korea is no exception.

Although the Bank of Korea keeps its key rate at a record-low 1.25 percent, banks have substantially raised their rates. If the Federal Reserve raises the U.S. policy rate this month, the upward trend will accelerate.

Financial Services Commission Chairman Yim Jong-yong said Thursday the government will mobilize the bond market stabilization fund to keep bond market rates from rising further.

He expected money market rates to fluctuate for a while due to external uncertainties, including the expected U.S. inflation.

Analysts said the construction industry, the main driver of the domestic economy, is unlikely to keep boosting the economy as the government should rein in growing home-backed loans.

“Thus far, construction investment has led economic growth, but the boom is expedted to fizzle out next year,” said Prof. Yun Chang-hyun at the University of Seoul. “A really bad year seems to be ahead of us.”

Construction companies expanded their investment 3.9 percent last year and the uptick is estimated to reach 7.6 percent this year, according to the LG Economic Research Institute.

But the growth rate is expected to fall to 0.6 percent next year because of recent government measures to let steam out of the overheating real estate market.

Still, some analysts caution against having too pessimistic views on the economy.

Shinhan Financial Investment analyst Lee Sun-yup said, “Our foreign reserves are currently more than $37 billion and our economic fundamentals are not so bad compared to other countries. It is too much to equate today’s situation to the Asian financial crisis.”

Companies remain reluctant to expand investments due to internal and external uncertainties. Their investment fell 3.8 percent this year from a year earlier, according to the Korea Institute for Industrial Economics and Trade.

People also refuse to open their wallets. The Bank of Korea said the consumer confidence index plummeted last month to the lowest level in seven and a half years.

Exports fell 7 percent year-on-year to $450.6 billion in the first 11 months of the year.

There remains one more pillar — the government. However, the administration is unlikely to steer the economy out of its current doldrums given the ongoing corruption scandal paralyzing President Park Geun-hye.

Source: http://www.koreatimes.co.kr/www/news/biz/2016/12/123_219359.html

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