South Korea’s Lee Ju-yeol has beaten the odds three times in four years. First, in 2014 when he was chosen to run the Bank of Korea after dispensing withering criticism of its priorities. Second, by succeeding in a decidedly tough job. Third, by becoming the first BOK governor to win a second term in 44 years. The question now is: can Lee surprise us a fourth time?
As Lee’s Act II begins, no challenge looms larger than a US$1.3 trillion household-debt burden imperiling Korea’s economic outlook and obstructing its path to achieving developed-nation status. What’s intriguing about this bubble is how it links many of Korea’s problems – political paralysis, the dominance of family-owned conglomerates and unfinished business from the 1997 Asian financial crisis.
The 8.1% jump in household debt last year is the latest reminder that government curbs need reinforcement. The good news: it was the slowest in three years. Steps by President Moon Jae-in since taking office in May to prevent overheating in property markets appear to have gained some traction.
The bad news: even if banks’ mortgage business slowed, loans elsewhere – particularly from internet-based lenders – more than picked up the slack. And so, the debt bubble keeps rising.
The dominance of family-owned conglomerates, meantime, is a key reason wages aren’t rising markedly faster than inflation. Youth unemployment, for example, hit a record high 8.6% in 2017. Jobs are scarce for Koreans between 15-29 in part because these so-called chaebols impede the growth of small-to-mid-size enterprises. Their outsized influence also starves Korea of a more active startup scene. Increased household debt flows from these dynamics.
They flow, too, from decisions lawmakers and regulators made 20 years ago. In 1997, an extreme concentration of debt among chaebols left Korea Inc. overly top-heavy. Hence the economy’s epic fall.
It’s Lee’s turn at the BOK to get a handle on a bubble that’s approaching the size of Korea’s US$1.5 trillion annual output
As part of the recovery, government policies sought to shift the credit engine to the consumer side of the ledger. That included a national push to prod businesses to accept credit cards and consumers to use them early and often. It was partly about tax officials seeking a paper trail for transactions. The upshot is that the ratio of debt to disposable income has risen well above the Organization for Economic Cooperation and Development average – 170%, versus an average of 123%.
In October, Seoul tightened debt-to-income requirements for loans and mortgages, disincentivized real estate speculation and added targeted curbs. But it’s Lee’s turn at the BOK to get a handle on a bubble that’s approaching the size of Korea’s US$1.5 trillion annual output.
The BOK is involved, of course. In recent years, it operated the Household Debt Task Force to collect data, perform stress tests and incorporate debt levels into its interest-rate deliberations. The central bank honed a model for experimenting with macroprudential tweaks to rein in excesses.
It’s time, though, for some monetary courage. On November 29, the BOK became the first major Asian central bank to tighten since 2014, upping the seven-day repurchase rate 25 basis points to 1.5%. Lee should step up the pace to take some froth out of household excesses.
Korea can handle it. The economy is seen growing about 3% this year, amid buoyant global demand. While risks abound, the US is booming, China is operating at 6.5%, Japan is enjoying its second-longest postwar expansion and even Europe is stable. Lee wants to tread carefully, of course. With US President Donald Trump threatening a trade-war and pledging to visit Pyongyang, who knows what the next 12 months hold.
Lee winning a rare Act II is a boon for BOK autonomy – and his clout in Seoul. He’s proven himself to be a maverick before, criticizing his predecessor’s staffing choices. Lee must tap his inner rebel and take his gravitas out for a ride to beat the odds with a regimen of slow, but steady tightening.