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Immigration and technology investment are key to surviving rapid population aging
Written by Lee Kyung-min
Household debt will be the biggest downside risk to the Korean economy in 2024. A decline in exports due to China’s slowdown and weak consumer spending will also be a headwind for export-dependent countries. Still, the worst of the chip downcycle is nearing an end, and improvements in the sector are expected to boost exports in coming months.
Eight economists surveyed by The Korea Times from December 11th to 22nd revealed their economic outlook for South Korea in 2024. They said inflation would gradually slow down, giving the Bank of Korea (BOK) more room to take expansionary monetary policy.
Rising household debt poses a long-term threat to the economy, but the risk of an immediate large-scale default is low, they added. They suggest bringing in more immigrants and investing in technology, as no government policy can reverse low birth rates, as the main solution to a rapidly aging population.
household debt
“Household debt is the biggest downside risk to the Korean economy,” said Kim Wan-joon, chief economist at Hana Financial Research Institute and Hana Bank.
He said the increase in household debt over the past few years was mainly explained by ultra-low borrowing costs, which were extended during the COVID-19 pandemic.
“Many people purchased homes at record low interest rates, but the rapid contraction of the expansionary financial cycle has increased interest costs, reduced disposable income and reduced overall household purchasing power,” he said. It’s declining,” he said.
Bankruptcies caused by low-income borrowers with bad credit can lead to a decline in the financial health of banks and other lenders, and there are a number of important risk factors that should be closely monitored.
Similarly, Cho Kyung-ryup, chief researcher and director of economic research at the Korea Economic Research Institute (KERI), said that the long-term accumulation of interest payments is putting pressure on the finances of businesses and households.
“Bankruptcy concerns are growing, as evidenced by the recent spike in delinquency rates. This, combined with the slowdown in China and the risks of the US presidential election, is a big red flag for the country.”
Chung Kwang-woo, chairman and CEO of the World Economic Institute, said household debt and project finance exposure in the real estate sector is the biggest downside risk to the South Korean economy.
This is why Jun argues that while tight monetary policy should be maintained until inflation is fully controlled, selective and cautious fiscal stimulus may be necessary to alleviate recessionary pressures. There are two debt-oriented risks.
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Dave Chia, an associate economist at Moody’s Analytics, shared a similar view.
High interest rates have slowed household debt growth, but a rate cut by the South Korean central bank in 2024 could trigger a reacceleration, he said.
However, Chia said these potential risks would be mitigated by the Financial Services Commission enforcing stricter lending practices and implementing strong debt restructuring measures.
“Banks will be required to strengthen their capital reserves to increase their loss-absorbing capacity and conduct stress tests to ensure financial resilience,” he said.
Kim Chang-Hyun, assistant professor of strategy at the China-Europe International Business School, opposes deregulation to reduce household debt, but predicted that the upcoming general election will be carefully considered.
“The government will likely raise the prices of apartments in Seoul in the run-up to the election,” the assistant professor said.
However, Son Sung-won, a professor of economics at Loyola Marymount University, said concerns about household debt could be alleviated by increasing employment, lowering the inflation rate and lowering interest rates by the Bank of Korea.
“Compared to the United States, Korean households hold a large amount of cash or cash equivalents on their balance sheets, so the debt burden is not as severe as it appears on the surface,” Son said.
According to the Bank for International Settlements, South Korea’s household debt to GDP ratio was 101.7% as of the second quarter of 2023. South Korea is just one of the few economies where debt exceeds GDP.
slowdown in china
Louis Cuis, Asia-Pacific chief economist at S&P Global Ratings, said the main risks to growth come from the potential for slower growth in the West and China.
“An upside surprise for US inflation would require a longer-term hike in US policy rates and highlight pressure on Asian currencies and markets,” he said.
“Further significant increases in global energy and commodity prices could stimulate inflation and external balances, putting new downward pressure on currencies.”
Chu Won, deputy director of the Institute of Contemporary Economic Research, held a similar view that a decline in exports could hinder the country’s growth.
“South Korea is highly dependent on China, but the country’s recent economic woes are unlikely to find a solution soon. South Korea’s exports may suffer in the process.”
According to data from the Korea International Trade Association, South Korea’s exports to China accounted for 19.5% of the total in the first half of 2023, down significantly from 25.3% in 2021.
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Debt crisis?
Moody’s Analytics’ Chia said South Korea’s high household and corporate debt as a percentage of gross domestic product (GDP) may suggest that a financial crisis is becoming more likely, but it is not imminent. He said the risks appear to be minimal.
This is because the financial system is robust and well regulated, and a debt crisis is unlikely in the short term.
Despite a recent increase in non-performing loans in both the household and corporate sectors, default rates remain low and do not pose an immediate threat to financial stability, analysts said.
“It is important that macroprudential measures are strong enough to prevent the possibility of default and debt escalation, which could compound risks over time,” he said.
Son also downplayed doomsday scenarios.
In the United States, South Korea, and other developed countries, much of the debt is denominated in local currencies, so a debt-triggered financial crisis is less likely. The United States can print dollars to pay off its dollar debt, even if inflation continues to rise. Although some developing countries such as Sri Lanka and Egypt have debt problems, he does not see them causing a global financial crisis.
“If an emergency were to occur, South Korea would be able to deal with it by making use of its large foreign exchange reserves and swaps with foreign central banks,” Son said.
However, Hana Institute’s Kim said caution is needed, given the high levels of debt in households, businesses, and the real estate project finance sector.
“It is difficult to completely rule out the possibility of a debt crisis,” the chief economist said. “However, given the current low loan-to-value ratio and the banking industry’s ability to absorb losses, full-scale financial system risk is likely to be avoided.” ” he said. He said.
Mr. Cho of KERI expressed a similar opinion.
Rising delinquency rates do increase the likelihood of a debt-driven crisis, the main outcome of which will be a liquidity squeeze, making it difficult for companies to raise funds.
“Governments should tailor their support to small and medium-sized businesses, a group that is more likely to be exposed to a serious crisis than large companies with deep cash reserves,” he said. “Funding and debt restructuring support should be pursued, but companies with little prospect of recovery or profitability will need to undergo fundamental restructuring.”
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elderly population
Mr Chia said the aging population cannot be changed quickly unless steps are taken to strengthen the workforce.
“Immediate strategies could include encouraging immigration, especially to some of the businesses whose populations are declining the most.More sustainable solutions could increase productivity through technological advances and increased capital. “It will improve,” he said.
Son agreed: “Demographics are very negative for the Korean economy. In the short term, increasing immigration as well as investing in technology are the main solutions.”
Hana Institute’s Kim said an aging population coupled with declining birth rates is pushing up government debt and welfare spending, posing long-term risks.
“With declining vitality and a shrinking workforce, the country’s growth momentum could lose momentum.Practical measures to strengthen work-family balance, including paid family leave, are at stake. “It will help solve the problem,” he said.
Issues for 2024
Economists say the key questions in 2024 will be when and how much the U.S. will cut interest rates, as well as mitigating the geopolitical risks surrounding the Israel-Hamas war and Russia’s invasion of Ukraine, the end of which could disrupt reconstruction projects. will proceed.
As the battle for global supremacy between the US and China continues to drag on and intensify, the US presidential election has become another focal point for the global economy.
“OpenAI, the US election, and subsequent policies will increase tensions between the US and China,” said CEIBS’s Kim.
Key considerations for the global economy include geopolitical tensions, which continue to pose significant risks to supply chains, trade and commodity prices, Chia said.
“The trajectory of inflation across various economies is also important, particularly in relation to monetary policy easing,” he said.
Economists said the downturn in the Chinese economy will have a deep and lasting impact on the South Korean economy, particularly on China’s real estate sector and debt risks across the government. A weakening of the world’s largest consumer market will hurt export-oriented economies, including South Korea.
“Global economic growth and geopolitical turmoil will have a major impact on South Korea,” Son said.
Zhu said discussions about the new normal after the pandemic will accelerate, and economies around the world will be required to find ways to strengthen sustainability through “low growth”.