Household debt ratio hits decade low at 81.3% — semiconductors drive the drop

South Korea's household debt-to-GDP ratio fell to around 81.3% at the end of the second quarter, the lowest level in more than a decade, driven by a surge in nominal GDP fueled largely by the semiconductor sector. The result raises the prospect that the government could hit its 80% target years ahead of its 2030 deadline.

According to Bank of Korea and Bank for International Settlements (BIS) data, the ratio stood at around 81.3% as of the end of the second quarter. If confirmed, that would be the lowest reading since the second quarter of 2016, when it stood at 80.2%.

The government has set a target of reducing the household debt-to-GDP ratio to around 80% by 2030. The latest estimate puts the ratio just about 1.3 percentage points above that threshold — a significant narrowing of the gap with more than four years still to go before the deadline.

The estimate was derived by applying the Bank of Korea's second-quarter household credit growth rate to the BIS's first-quarter household and nonprofit institution debt balance, then dividing the result by the sum of nominal GDP over the four most recent quarters. The calculation assumes that as-yet-unpublished second-quarter household debt grew at the same rate as household credit in that period.

BIS data show South Korea's household and nonprofit institution debt balance stood at 2,374.1 trillion won ($1.75 trillion) at the end of the first quarter. Applying the 1.3 percent quarter-on-quarter growth rate from the Bank of Korea's second-quarter household credit balance of 2,019.8 trillion won yields an estimated second-quarter debt figure of about 2,404.9 trillion won. Dividing that by the combined nominal GDP for the four quarters from the third quarter of last year through the second quarter of this year — 2,958.6 trillion won — produces the 81.3 percent ratio.

The combined nominal GDP for those four quarters rose about 6.2 percent compared with the figure used in the first-quarter calculation, far outpacing the 1.3 percent debt growth rate and driving the ratio lower.

Bank of Korea preliminary national income statistics show that nominal GDP in the second quarter grew 26.4 percent from a year earlier — the highest growth rate in 47 years, since the third quarter of 1979, when it reached 27.7 percent. Bank of Korea Governor Shin Hyun-song signaled the trend at a monetary policy press briefing last month, saying nominal GDP would come in "quite high" and that "since nominal GDP is the denominator when calculating all debt ratios, debt ratios and soundness indicators will improve considerably."

Official BIS data also show a decline in South Korea's household debt ratio. The BIS put the country's household debt-to-GDP ratio at 85.1 percent at the end of the first quarter, down 3 percentage points from 88.1 percent at the end of last year and the lowest since the first quarter of 2018, when it also stood at 85.1 percent. The ratio peaked at 99.1 percent at the end of the third quarter of 2021 and has been falling since.

The Bank of Korea's second-quarter flow-of-funds statistics are due Oct. 7, while the BIS's second-quarter debt data are scheduled for release Dec. 7.

However, a lower debt-to-GDP ratio does not mean households are finding it easier to service their loans. In its monetary and credit policy report released Thursday, the Bank of Korea said the household debt-to-GDP ratio "will decline, but remains high compared with major advanced economies," adding that "given the possibility of increased housing purchase demand as income conditions improve, the need to manage household debt remains significant."