Korea un­veils new house­hold debt-stem­ming mea­sures

The Pak Banker - - COMPANIES/BOSS -

Moody's In­vestors Ser­vice says that Korea's latest mea­sures to con­tain the coun­try's high lev­els of house­hold debt will have a pos­i­tive long-term ef­fect on fi­nan­cial sta­bil­ity and ul­ti­mately sup­port the sov­er­eign credit pro­file.

Ac­cord­ing to a re­lease from Moody's In­vestors Ser­vice, how­ever, in­creased re­stric­tions on mort­gage lend­ing will pose down­side risks to GDP growth in 2016. Moody's con­clu­sions were con­tained in its just-re­leased re­port on Korea, en­ti­tled "Korea, Gov­ern­ment of: Tighter House­hold Debt Man­age­ment Poses Down­side Risk to Growth in 2016." Ac­cord­ing to the 22 July an­nounce­ment, the Korean gov­ern­ment will in­crease tar­get shares for fully amor­tiz­ing mort­gages and fixed rate loans, and urged lenders to fo­cus more strictly on house­holds' re­pay­ment abil­ity, ef­fec­tive from Jan­uary 2016. From Septem­ber, the author­i­ties will also strengthen rules gov­ern­ing and mon­i­tor­ing of the non­bank sec­tor. The mea­sures fol­low the launch of a mort­gage re­fi­nance pro­gram in March.

Korea's house­holds have in­creased their bor­row­ing over the past decade and have debt lev­els sim­i­lar to some of the most in­debted ad­vanced economies, at around 73% of GDP as of the end of 2014.Moody's does not view the high lev­els of house­hold debt as pos­ing a sys­temic risk given that most debt is held by high­in­come house­holds, whose fi­nan­cial as­sets are worth more than dou­ble their li­a­bil­i­ties.

Un­der the new mea­sures, house­holds will have to make prin­ci­pal pay­ments to­ward fixed-rate mort­gages on a monthly ba­sis, while in­tere­stonly bullet loans merely re­quire in­ter­est pay­ments un­til the end of the loan term. The over­all amount to be re­paid is likely to be lower un­der the new struc­ture, al­le­vi­at­ing po­ten­tial longert­erm risks to house­hold fi­nan­cial sta­bil­ity, says the rat­ing agency. How­ever, the tem­po­ral dis­tri­bu­tion of the pay­ments will likely place ad­di­tional down­ward pres­sure on con­sump­tion and GDP growth in the near term, at a time of al­ready weak do­mes­tic de­mand, par­tic­u­larly since pri­vate con­sump­tion con­sti­tutes around half of nom­i­nal GDP.

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