Deepening financial imbalances in South Korea due to rapid asset price gains and excessive borrowing threaten to hurt the economy, the Bank of Korea (BOK) said yesterday.
Such imbalances could affect the economy negatively if there is a shock triggering a correction in the asset market and a rapid deleveraging of debt, the South Korean central bank said in a semi-annual report on financial stability.
South Korea is facing larger mid-to-long term financial risks than it did before the COVID-19 pandemic, it said.
Real estate, in particular, is believed to “significantly overpriced” considering the country’s economic conditions, it said. The burden of debt repayment is growing among households as they struggle to improve income.
The report follows a series of comments by BOK Governor Lee Ju-yeol and other board members suggesting they would rein in the unprecedented stimulus unleashed during the pandemic at some point.
A majority of private economists surveyed by Bloomberg expect the central bank to start raising its benchmark rate by early next year as it grows more confident of the economy’s recovery.
On assets, the BOK said that while the gains partly reflect optimism over the economy once the pandemic recedes, some are likely overpriced.
Considering long-term trends, Seoul home prices are excessive relative to people’s incomes, it said.
While risk appetite in the equity market has increased, price-to-earnings ratios remain low compared with other major economies, the bank said.
On cryptocurrencies, the BOK said that it was difficult to find “rational grounds” to explain the rally during the pandemic.
The central bank trimmed its rate by a total of 75 basis points last year, and has kept it at a record low of 0.5 percent since May last year.
The ratio of South Korea’s debt-to-disposable income reached 171.5 percent at the end of the first quarter, an 11.4 percentage point jump from a year earlier, the report showed.
The bank also weighed in on climate issues. It said the risks to the economy and banks’ capital adequacy ratios should grow significantly from 2040, when costs to reduce greenhouse gas are set to rise rapidly.
South Korea aims to become carbon neutral by 2050.
By 2050, the BOK expects a 2.7 to 7.4 percent loss in GDP compared with last year from implementing policies to reduce greenhouse gas emissions.
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