South Korea’s financial system is mostly stable but faces potential risks stemming from the U.S. and the Chinese economies as well as household debt and weakening corporate profit at home, a central bank report said Thursday.
The U.S. Federal Reserve’s rate hike and China’s weakening growth are short- and long-term issues that may “considerably”
affect the Korean economy, the Bank of Korea (BOK) said in a semiannual financial stability report.
The central bank forecast the impact to be stronger if the risk factors occur simultaneously and spur financial instability in emerging market economies.
It also mentioned the sluggish eurozone economy and a weakening yen as short-term risks for Asia’s fourth-largest economy.
The report came after the Federal Open Market Committee (FOMC) decided to end its quantitative easing, while keeping its near-zero interest rate “for a considerable time.”
Earlier in the day, the government said in a statement that the FOMC decision was expected and that its impact on the local foreign currency and financial markets would be limited.
Falling corporate profitability, growth and deterioration in financial soundness of household debt were also cited as domestic factors that should be carefully monitored.
Heavy household debt has been a source of headache for policymakers as its size stood at 1,040 trillion won (US$987 billion) as of end-June.
A recent easing of mortgage lending rules, part of the government’s plan to boost property prices, as well as falling borrowing rates at banks have raised concerns they may further stoke the borrowing to worrisome levels.
The central bank noted that while such factors may prompt households to increase their mortgage lending, the impact is likely to be limited given the lackluster property trade.
The central bank said while eased mortgage rules and low borrowing rates may stoke short-term hope for a rise in property price, the sentiment is unlikely to spread in the long-term considering the country’s changing demographics.
It still raised caution over demographic shifts, including the mass retirement of baby boomers and their opening of their own businesses. The household debt situation may deteriorate since their income growth generally lags behind debt growth, the report said. (Yonhap)
