
4 minute read
South Korea: On the Verge of Another Debt Crisis?
By Hana Chow
The recent hit TV show, Squid Game fascinated watchers with exhilarating plot twists and the thrilling, haunting storyline. The show features a game with individuals in large sums of debt competing to earn a colossal cash prize of 456 million. While this may seem like just another thriller, throughout the show people couldn’t help but notice the countless hidden economic themes that were displayed surrounding economic security that are anything but fictional. A central theme often revisited throughout the show was the crippling debt crisis in South Korea. But what exactly is happening in today’s South Korean society?
Advertisement
Well, statistics show that the situation depicted in Squid Game is extremely real, displaying the serious debt issue in South Korea.
The South Korean debt crisis has been existing for decades with the constant issue of national, corporate and household debt. To provide some historical context, after years of a highly maintained economy, South Korea entered a significant debt crisis in the year of 1997. Mismanagement of funds and failed macroeconomic policy soon led the country to economic turmoil. With assistance from the IMF, South Korea was able to recover from this short-term suffering. However, the crisis did not end there. As the country developed over time, new policies, such as housing policies, started raising income-taxes and the living and housing costs. In fact at around 2017-2020 the housing prices rose to over 30%, which proved to be a large economic burden for citizens living in South Korea. Furthermore, the recent COVID-19 pandemic caused increasingly risky and dangerous political investments after the decrease in small business and employment rates which have only escalated the debt crisis in South Korea.
Along with the increase in household debt, Korean housing prices have been soaring in recent years. This is primarily due to the previous Korean government’s policy to suppress housing demand by putting restrictions to real estate prices. However, with increasing population and growing demand for housing in only certain areas such as the capital, Seoul, the housing prices skyrocketed and the policies failed. This has only contributed to the ever growing household debt and financial crisis individuals are experiencing in South Korea currently.
With the growing household debt crisis in South Korea, the individuals facing the largest effects are young middle-aged adults, of which many experience or have experienced a spiralling economic security This has been proven through data from the central bank reporting that young individuals around the age of 30 are most in debt with an average of 270% of debt compared to their income.
Additionally, with the dramatic increase in the income gap due to the rise of the COVID-19 pandemic in South Korea, the average household debt to income ratio in South Korea in total has surpassed more than 5% of the country's GDP. The debt crisis has been further exacerbated as COVID-19’s enervative impacts seem to target small businesses, leading to unemployment, and causing an increase in individuals in South Korea receiving loans from multiple high street banks simultaneously causing a turmoil in managing and paying off existing loans. This has caused many to not be able to afford the rising house prices and experience a downfall in their economic security and finances.
As the issue of household debt in South Korea continues to be a threat to the economy, new policies have been implemented to help mitigate this situation. A significant policy that was recently made was a refinancing policy that encourages low-income households and individuals to refinance their debts and mortgages through fixed-rate loans to ease the situation of the accelerating rate of debts. Furthermore, the South Korean government has provided incentives for youth to start saving up and building their financial assets to be financially stable in the future to prevent unpayable debt. Additionally, to prevent the ongoing increase in living costs and housing issues, along with the change of property taxes and regulations, housing policies to reduce the imbalance of supply and demand for the housing in major cities in South Korea should be revamped.
Although the situation of the debt crisis in South Korea has not shown signs of slowing down recently, the relaxation of COVID-19 restrictions and impacts on South Korea’s economy as well as new housing policies and debt related policies might just determine the future of the debt crisis and the longevity of South Korea’s ever changing and developing economy.