South Korea: Houshold debt

[Sabri Oncu <soncu@xxxxxxxxxxx>]

03 Jun 2002
Drastic plastic? The credit card boom
COUNTRY BRIEFING

FROM THE ECONOMIST INTELLIGENCE UNIT

Most football fans flocking to South Korea for the World Cup will
pay for goods and services the modern way, using credit cards.
Few will know that their hosts sport more plastic than they do.
With 89m cards issued, the average adult Korean has four,
compared with two in Japan, 1.8 in the US, or 0.9 in the UK. Yet
this is a very recent phenomenon. Here, as so often, Korea has
come from behind: three years ago there were only 42m cards. Card
transactions soared from $33bn in value in 1998 to $333bn last
year, doubling in both 2000 and 2001. In 1999 16% of total
consumer spending was by credit card; now it is 56%. With plastic
usage forecast to go on growing for several years yet at 25%
annually, a hot debate has sprung up in Seoul on whether this
carries risks.

This is a revolution on many fronts. Hitherto Koreans, like
others in Asia, were famed for thrift and high savings rates. In
truth they had little choice, as credit instruments for
big-ticket items - house mortgages, or hire purchase for cars and
consumer durables - hardly existed. Filling the gap were usurers
and a shady kerb market, charging vast interest; or "kye"
(traditional communal savings clubs, mostly of women who in Korea
run household finances). Banks largely ignored individual
customers, whose deposits they lent to "chaebol" (conglomerates)
on easy terms (often based on connections or official fiat and
without proper evaluation). Small businesses suffered too, using
chaebol promissory notes as quasi-currency in the absence of
loans. All rather primitive.

The 1997 financial crisis exploded this system. Banks most
heavily exposed to the chaebol had to be bailed out by
government, leaving those focussed on retail business in better
shape. The government also wanted to get consumers spending: in
1998 their instinctive reaction of belt-tightening had deepened
the post-crisis recession, and GDP shrank by 5.8%. Separately, it
needed to tighten its tax take - not least to pay for bank and
related rescues, to the tune of W150trn ($120bn) so far. Plastic
fitted the bill all round. Banks suddenly discovered consumers as
a market: good risks, under-borrowed, diverse and enabling higher
margins than on corporate lending. Government offered tax rebates
on credit card use, with huge success. The Ministry of Finance
and Economy (MOFE) reckons this raised an extra W3.8trn in
revenue last year, with small businesses no longer able to evade
the net. It now wants to force self-employed professionals to
take payment by card for the same reason. In addition the card
boom saved South Korea from recession, with consumer demand
making up for flagging exports. Last year private consumption
accounted for 58% of GDP.

This sounds like win-win all round, but some are worried.
According to Morgan Stanley, South Korea has the world's fastest
growing household debt - up from 18% to 62% of GDP in just two
years, a rise which even in the profligate US took a decade.
Moreover 60% of transactions are cash advances, at interest rates
above 20%. The fear is that spendthrift consumers - and pushy
lenders - could collapse just as big firms did, if growth
falters. With real estate prices in Seoul up 19% last year, store
sales rising 18.8%, and this year's GDP growth predicted at 5-6%,
another concern is overheating, although May's 0.25% rise in the
base lending rate signalled that the Bank of Korea is vigilant.

Is there cause for alarm? A strong dose of moralism, mainly in
older Koreans but fomented by former administrations, paints
spending - especially on luxuries, above all if foreign - as
sinful; conversely, frugality and saving are patriotic. This
attitude has seized on the odd crime by debt-ridden teens as
proof of the end of civilisation. Such anxieties aside, two
concrete concerns are aggressive credit card distribution (even
on the street, and to minors) without proper checks; and
inadequate provisioning against default, expecting only a 2-3%
rate where 8-10% would be more realistic.

In mid-May the government banned house calls by credit card
sellers, but relented on May 30th on fears this would put most of
the 100,000 agents out of work. But it will regulate companies'
use of member information, while seeking to separate card firms
from instalment finance and leasing. Under official pressure,
major lenders are cutting cash advance interest rates slightly.
Yet on the tax front, MOFE plans to extend the deduction for card
use by three years to 2005.

At 96% of disposable income, Korean household debt is now
comparable to that in the west. Personal borrowers will be less
reckless than Korea Inc - which in turn must now rely more on
equity issues, strengthening shareholders. Consumer demand is
good for growth, and it forces firms to make what people want.
All this is healthy - if the binge does not become a bubble.

SOURCE: ViewsWire London

Full at:
http://www.viewswire.com/index.asp?layout=display_article&doc_id=
192875