High delinquencies on the horizon for South Korea's financial market: report

Although the market is now stable, more problems are expected, local regulator says.

Whilst South Korea’s financial market will continue to be stabilised, the economic fallout from the COVID-19 pandemic may drive banks’ debt delinquency rate to sharply increase, according to the Bank of Korea (BOK), reports Yonhap News Agency.

"Whilst economic activities will gradually resume from the second half of the year, the financial market will continue to be more stabilised, but there is a possibility that the negative impact from the COVID-19 pandemic on the financial system may come to the surface," the central bank said in a biennial report on financial stability submitted to the National Assembly.

They added that conditions may further deteriorate should the pandemic become more serious with a second wave.

Local households' ability to pay back their debt worsened due to a reduction in income, apparently caused by the new coronavirus outbreak.

As of the end of March, households' debt to disposable income ratio came to 163.1%, up 4.5% from the same period last year, according to the BOK.

"Uncertainties in the financial market have generally eased on active market stabilisation efforts by the government and the Bank of Korea, but financial instability may again present itself, depending on the course of the COVID-19 pandemic," it said.

"Should the country's employment conditions worsen to the level of a financial crisis due to the COVID-19 pandemic, its debt delinquency rate is expected to sharply increase as the debt repayment capacity of income-earning households will shrink," it added.

Currently, the regulator said that South Korea’s financial system is in a better position than it was two months earlier, shortly after the new coronavirus outbreak here peaked at around 900 new cases per day in late February and early March.

The country's financial stability index shot up to 22.3 in April, breaching the lower boundary for a crisis warning, but it has since come down to 18.

As of end-March, outstanding debt of South Korean households reached $1.33t (1,611.3 trillion won), up 4.6% from a year earlier and a slight acceleration from Q4 2019.