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Household debt will be the largest downside risk to the Korean economy in 2024. Falling exports driven by China's slowdown and weakening consumer spending will also be among headwinds for the export-dependent country. Still, the worst of the chip downcycle is coming to an end and improvement in the sector is expected to boost exports in the months to come.

Eight economists surveyed by The Korea Times from Dec. 11 to 22, laid out their economic outlooks for Korea in 2024. They said inflation will slow down gradually, creating more room to maneuver for the Bank of Korea (BOK) in expansionary monetary policy.

Rising household debt poses a long-term threat to the economy, although the risk of an immediate widespread default is low, they added. More immigration and investment in technology will be the primary solution for rapidly aging demographic trends, since no government policy can reverse low birthrates.

Household debt

“Household debt is the largest downside risk to the Korean economy,” said Kim Wan-joong, chief economist at Hana Institute of Finance and Hana Bank.

Household debt climbing over the past few years is explained in large part by ultra-low borrowing costs extended during the COVID-19 pandemic, he said.

“Many people bought houses at record-low rates, but the rapid drawdown in the expansionary monetary cycle is leading to higher interest burden and a corresponding decrease in disposable income and overall decrease of household purchasing power,” he said.

Insolvencies by low-credit, low-income borrowers are translating into compromised financial soundness in banks and other lenders, a slew of critical risk factors to be closely monitored.

Similarly, Cho Gyeong-lyeob, senior research fellow and economic research department director at Korea Economic Research Institute (KERI), said long-term accumulation of interest payment burdens is straining the finances of businesses and households.

“The insolvency concerns are amplifying, as evidenced by the recent surge in delinquency rates. This is a major red flag for the country, coupled with China's slowdown and the U.S. presidential election risks.”

Jun Kwang-woo, chairman and CEO of the Institute for Global Economics, said household debt and project financing exposures in real estate sectors are the largest downside risks to the Korean economy.

The two debt-oriented risks are why Jun says tight monetary policy should be maintained until inflation is fully under control, whereas selective yet prudent fiscal stimulus may be needed to mitigate recessionary pressure.

Dave Chia, associate economist at Moody's Analytics, shared a similar view.

High-interest rates have slowed the buildup in household indebtedness, but rate cuts by Korea's central bank in 2024 could trigger a reacceleration, he said.

However, these potential risks will be mitigated by the Financial Service Commission enforcing stricter lending practices and implementing robust debt restructuring measures, according to Chia.

“Banks will be required to strengthen their capital reserves to improve their loss-absorbing capacity and perform stress tests to ensure financial resilience,” he said.

Kim Chang-hyun, assistant professor of strategy at China Europe International Business School, was against relaxing regulations to reduce household debt but predicted the upcoming general elections are a tricky consideration.

“The government will boost the prices of apartments in Seoul in the lead-up to the elections," the assistant professor said.

However, household debt concerns can be mitigated by rising employment, lower inflation and cuts in the interest rate by BOK, according to Sohn Sung-won, professor of economics at Loyola Marymount University.

“Compared to the U.S., Korean households keep a large amount of cash or cash equivalents on their balance sheet. Therefore, the debt burden is not as serious as it looks on the surface," Sohn said.

According to the Bank for International Settlements, Korea's household debt-to-GDP came to 101.7 percent as of the second quarter of 2023. Korea is only among a few economies whose debt exceeds GDP.

China slowdown

Louis Kuijs, APAC chief economist at S&P Global Ratings, said key risks to growth stem from possibly slower growth in the West and China.

“Upward surprises on inflation in the U.S. would call for policy rates there to be higher-for-longer, accentuating the pressure on Asian currencies and markets,” he said.

“Significant further increases in global energy and commodity prices would stoke inflation and external balances and possibly also fuel renewed depreciation pressure on currencies.”

Ju Won, deputy director at Hyundai Research Institute, had a similar view that falling exports could hinder the country's growth.

“Korea is heavily dependent on China, but recent economic woes in the country are not likely to find a breakthrough any time soon. Korea's exports in the process can take a hit.”

Korea's exports to China accounted for 19.5 percent of the total in the first half of 2023, significantly down from 25.3 percent in 2021, according to data from the Korea International Trade Association.

Debt crisis?

Korea's high ratio of household and corporate debt relative to GDP might suggest an increased possibility of a financial crisis, but the immediate risk appears minimal, Chia of Moody's Analytics said.

This is because the financial system is robust and well-regulated, reducing the likelihood of a debt-induced crisis in the short term.

Default rates remain low and pose no immediate threat to financial stability, despite a recent uptick in nonperforming loans in both the household and corporate sectors, the analyst said.

“It is crucial that macroprudential measures are sufficiently strong to prevent potential defaults and an escalation of debt that could amplify risk over time,” he said.

Sohn also downplayed the doomsday scenario.

A debt-triggered financial crisis is not likely in the U.S., Korea and other developed countries, because much of these debts are in local currencies. In the U.S., the dollar debt can be serviced by printing the dollar even though it would lead to more inflation. Some developing countries, including Sri Lanka and Egypt, have debt problems but won't cause a global financial crisis, in his view.

“If one does occur, Korea can handle it using its large foreign exchange reserves and swaps with foreign central banks,” Sohn said.

However, caution is needed, according to Kim of Hana Institute, given the high level of debt in the household, businesses and real estate project financing sectors.

“It is difficult to completely rule out the probability of a debt crisis. However, outright financial system risks will be avoided, as underpinned by the low current loan-to-value ratios and the banking industry's loss-absorption capacities,” the chief economist said.

Cho of KERI echoed the view.

A rise in delinquency rates certainly raises the possibility of a debt-led crisis, the chief result of which will be a liquidity crunch whereby firms will find it difficult to raise funds.

“The government should provide tailored support for small- and medium-sized enterprises, a group more vulnerable to acute crises than large conglomerates with ample cash reserves,” he said. “Financing and debt restructuring assistance should be pursued, but entities of little prospect for recovery or profit must undergo a drastic restructuring.”

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Aging population

Chia said the population aging cannot be swiftly changed unless measures are taken to boost the labor force.

“Immediate strategies could involve encouraging immigration, particularly to parts of the businesses where the population is declining the most. A more sustainable solution would be to enhance productivity via technological progress and capital growth,” he said.

Sohn agreed: “Demographic trends are very negative for the Korean economy. In the short run, accepting more immigration as well as investing in technology are the primary solutions.”

Kim of Hana institute said the aging population in the context of low fertility rate pushes up increase in government debt and welfare expenditure, posing a long-term risk.

“The country's growth momentum can lose steam because of weakening vitality and decrease in labor force. Practical measures to solidify work-family balance will help solve the problem, including paid family leave," he said.

Talking points for 2024

The main issue for 2024, the economists said, is when and at what rate the U.S. will cut interest rates, as well as diminished geopolitical risk concerning the Israel-Hamas war and Russia's invasion of Ukraine, the end of which will advance reconstruction projects.

The U.S. presidential election is another focal point of the global economy amid the drawn-out yet strengthened U.S.-China global hegemonic dispute.

“OpenAI, the U.S. election and subsequent policies will intensify tension between the U.S. and China,” Kim of CEIBS said.

Key considerations for the global economy include ongoing geopolitical tensions, which continue to pose significant risks to supply chains, trade and commodities prices, according to Chia.

“The trajectory of inflation across various economies is also important, particularly in relation to the easing of monetary policy,” he said.

The economists said China's economic downturn will create a deep and sustained impact on the Korean economy, especially debt risks encompassing China's real estate sectors and the government at large. The weakening of the world's largest consumer market will hurt export-centered economies including Korea.

“Global economic growth and geopolitical turbulence will affect Korea a great deal,” Sohn said.

Discussion will pick up speed on the post-pandemic new normal whereby economies around the world are required to find a way to bolster sustainability via “low growth,” Ju said.