[SEOUL] South Korean households are piling on debt at the fastest rate in eight years thanks to big-bang stimulus launched by the new finance minister - but as global growth cools the government risks scoring an economic own goal and inflaming deflationary pressures.
That would be particularly ironic as finance minister Choi Kyung-hwan has repeatedly warned that Asia's fourth-largest economy is in peril of slipping into Japan-style deflation, which kept growth in the land of the rising sun stagnant for two decades.
Mr Choi, however, wouldn't have expected the chill that's enveloped the global economy since he took office in July, analysts say, and immediately set about re-energising the economy with an US$11-billion-plus stimulus package.
The impact has been seen in the debt binge by South Korean households, which boosted borrowing from banks by a net 9.32 trillion won (US$8.83 billion) during the August-September period mainly to buy homes, central bank data showed. The debt build-up is the most since the November-December period of 2006.
Home purchases and retail sales have grown sharply since August, with the pickup aided by two interest rate cuts, widely seen to have been made under pressure from the government. "The broad view (in June when Choi was nominated) was the global economy would be doing fine although domestic demand was lagging behind, but the situation has changed sharply by now as we just saw from the GDP data," said Oh Suk-tae, economist at SG Securities in Seoul.
Third-quarter GDP data on Friday showed that South Korean exports posted their first quarterly fall in a year, taking the gloss off a rebound in growth from a weak second quarter.
Some analysts, including ANZ bank and Barclays, continue to count on a steady pick up in consumption over the shorter term.
But the worsening in the global economic outlook and persistent underlying weakness in South Korea's property market could end up saddling households with heavier debt loads and undermining Mr Choi's strategy to boost growth, analysts say.
HIGH DEBT, DEFLATION RISKS
Worse still, it could add to deflation pressures, especially if households start paying back debt rather than spend - the very thing Mr Choi is trying to avoid under his policies dubbed 'Choinomics' by markets. "While we've generally felt rates would come down grudgingly to maintain financial stability, easing into an accelerating household credit cycle amplifies the risk of deflation in the future," Duncan Wooldridge, economist at UBS in Hong Kong, said in a recent note to clients.
To be sure, deflation is not an imminent risk for South Korea but concerns are growing. This year's consumer inflation is set to stay below 1.5 per cent for a second consecutive year - the first in the country's modern history and compares with an average of 3.3 per cent for the previous five years.
Warning of deflation risks, Choi has eased mortgage borrowing limits and offered some US$40 billion in public spending and financial support that includes the US$11 billion stimulus.
In some urban apartment blocks, flyers from consumer finance firms such as Hyundai Capital Co are informing homeowners that after Choi's measures they can now borrow tens of millions of won more.
South Koreans already carry debt that is 1.6 times annual disposable income, among the heaviest loads among major economies and even higher than the 1.4 times ratio in the United States in 2007, before the housing bubble burst triggered the global financial crisis.
Choi has brushed off worries that household debt could cause a serious problem, saying banks are strong, debt delinquencies are low and the anticipated revival of the economy will more than pay off.
Investors do not yet show signs of unease, but high household debt has been a rationale for capital flight at times of stress. In late 2008, South Korea drew down $43 billion of reserves in three months due to foreign selloff.
Now, export-reliant South Korea is exposed to slowing growth in China - its biggest market -an ailing euro zone, and a weak Japanese yen that erodes the competitiveness of local manufacturers.
Lee Hahn-koo, a senior lawmaker in the ruling Saenuri Party, noted that South Korea's property market has structural challenges that make reflation tough, including a shrinking population aged 30 to 50, the cohort most likely to buy a home.
"Such an attempt to lift real estate prices by encouraging lending can no longer work," said Mr Lee, who was widely seen as a potential candidate earlier this year to head the central bank. "Who can spend more when everyone is so busy paying back debt?"