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[Editorial] Worrying mix

Alert raised over a combination of rising household debt and declining employment

Rising household debt coupled with declining employment is posing a potentially severe problem to the country’s financial sector and by extension its real economy.

Recent data show South Korea’s household credit has been increasing rapidly since the coronavirus outbreak early this year, while employment conditions continue to worsen amid the pandemic crisis.

The on-month increase in household loans by local banks and nonbank lenders accelerated from 2.8 trillion won ($2.3 billion) in April to 8.5 trillion won in June and 14 trillion won in August, according to figures released last week by the Financial Services Commission.

Separate data made public earlier by the Bank of Korea showed the country’s household debt stood at a record 1,637.2 trillion won as of the end of June, up 25.8 trillion won from three months earlier. The figure broke down into 1,545.7 trillion won in household loans and 91.5 trillion won in credit sales.

Increased household loans have been spent on supporting the livelihoods of families hit by the pandemic’s economic shock or funneled into stock and real estate markets. The bullish asset markets, boosted by excess liquidity, have prompted people -- younger people in particular -- to borrow as much as possible to invest.

The steep rise in household loans comes amid a continuous reduction in the number of jobs, which are the key source of income necessary to bolster livelihoods and service debts.

The country lost about 274,000 jobs in August, marking a decrease in the number of employed people for a sixth consecutive month, as the coronavirus pandemic hammered the labor market, according to data compiled by Statistics Korea last week. It recorded the longest streak since the eight months of declines posted in 2009 in the aftermath of the global financial crisis.

Korea’s jobless rate rose by 0.1 percentage point on-year to 3.1 percent last month, with the number of employed people falling to 27.08 million.

The employment rate for those aged 15 and above was down 1 percentage point from a year earlier to 60.4 percent in August, the lowest figure in more than seven years.

The employment situation is expected to further worsen in September, given the government imposed stricter social distancing rules in mid-August to contain a resurgence in coronavirus cases. The latest monthly job survey was conducted shortly before the imposition of tougher distancing rules, which experts expect to put a considerable burden on the job market.

Stopping the payment of increased employment subsidies in September is expected to further worsen the situation.

The continuous deterioration of employment conditions would lead to a reduction in income, weakening the ability of households to pay the principal and interest on their debts.

The weakened capability to service debt would result in piling up bad loans, which in turn would destabilize asset markets and damage the real economy with the labor market further tightened.

The default rate on household debt has so far remained at a low level -- 0.33 percent in June -- but this is attributable mainly to measures to extend maturity and delay interest payments to help cushion the pandemic’s economic shock.

When such measures are withdrawn, the rate could rise sharply, leaving financial institutions, particularly nonbank lenders, exposed to higher risks from defaulted loans.

Financial regulators are now moving to check banks and other lenders from continuing to increase loans to households. It plans to more tightly monitor whether the 40 percent limit on the debt service ratio -- the ratio of households’ debt service payments to their annual earnings -- is applied strictly.

But tighter regulations on household loans could run the risk of driving economically marginalized families deeper into predicament.

The fundamental way to settle concerns about mounting household debt in the long term is to create more secure and well-paying jobs.

President Moon Jae-in’s administration has been focusing on creating jobs with taxpayers’ money. This approach has largely benefited senior citizens by providing them with temporary and part-time jobs, leaving young job seekers with fewer opportunities to find work.

The Moon government should seriously take on regulatory and labor reforms, which are essential to create more jobs preferred by youths in new and emerging industries.