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Management Report

Management reports, briefs issued by Samsung Economic Research Institute

How Business Can Help Farming and the Farming Community

How Business Can Help Farming and the Farming Community

KANG Shin-Kyum

Oct. 9, 2004

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Korea's household debt rose significantly in the past three years between 2000 and 2002, fuelled by aggressive retail financing and low interest rates. The annual debt surged 35% on average to reach 439 trillion won by the end of 2002, double the amount of 1997. The ratio of household debt to nominal GDP jumped to 64.1% in the same period. In 2003, these households entered a new phase of debt adjustment, indicating that the pace of increase has started to slow. The outstanding liabilities of consumers totaled 447.6 trillion won at the end of 2003, an increase of 1.9% from the end of 2002. In the first six months of this year, they rose by 2.3% to reach 458.0 trillion won.

"Adjustment" here refers to indebted households reducing liabilities to a level they can cope with. It is natural that household loans increase as the scale of economy expands. Thus, adjusting debt may be more clearly defined as controlling the pace of debt increase to a level that indebted households can actually handle, rather than reducing the debt volume itself. Indeed, consumer debt increases from 2000 to 2002 outpaced their ability to repay, which is a risk factor to the economy. As the household balance sheet steadily improves, however, the household debt-to-nominal GDP ratio is expected to fall to 59.3% by the end of 2004.

Completing the process of debt adjustment means that consumer debt is falling back to a manageable level. We may consider the household debt-to-nominal GDP ratio of the past two periods ?2000 to 2001 or 2001 - as such sustainable levels. The average ratio between 2000, when the growth rate of private consumption was below that of GDP, and 2001, when consumption outpaced GDP, stood at 50%. By the same token, the debt-to-GDP ratio stood at 54.9% in 2001. If the 2000-2001 debt level of 50% is considered acceptable, then time for completing debt adjustment could go up to the end of 2008. If the debt level of 2001 is considered to be a sustainable level, it is estimated that indebted households will need until mid-2006 to free themselves from the level of high indebtedness. This means that a full process of household debt restructuring will require 1.8 to 2.7 years to run completely.

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