Household budgets will be squeezed by elevated inflationary pressures and rising costs of debt repayment
B2C firms should expect Korean consumers to become more price sensitive and push back on additional price increases. MNCs should also expect consumers to trade down from premium and mid-segment products and services as household budgets get squeezed. Further, consumer demand is expected to weaken, especially for durables and household goods, as consumers will delay and avoid big-ticket purchases, wherever possible. Demand for on-trade services, recreation and entertainment, and travel will show resilience in the short term as consumers continue to capitalize on eased restrictions and open borders. B2B firms should expect self-employed persons and owner-run businesses to undertake fewer new investments in 2023, as rising interest rates and tightening liquidity will limit investment appetite.
South Korean households are among the most heavily indebted in the world. At the start of the year, household debt amounted to 107% of GDP. High levels of household debt are concerning in the Korean context because:
- One-third of the South Korean workforce is either self-employed or working in the gig economy. Such workers are highly vulnerable to economic shifts and downturns, disproportionately raising the risk of defaults during economic slowdowns.
- Lending practices in Korean commercial banks are looser than those of most developed countries. While the Korean government has introduced tougher lending regulations in recent years, through stricter income requirements for borrowers and tougher loan-to-deposit ratios for commercial banks, these measures have not successfully lowered overall debt levels. Conversely, some of these measures have forced desperate borrowers to rely on informal loans or credit cards, where the interest rate charged is much higher.
As the Bank of Korea continues to raise the benchmark interest rate, the budgetary pressure felt by Korean households will continue to rise. Interest and loan repayment burdens on consumers will increase, as the higher interest rates filter through the country’s financial system. This will represent an added pressure on households that are already contending with soaring inflation. The drastic fall of consumer sentiment into pessimistic territory over the past three months signals that consumers are feeling the pressures associated with rising living and borrowing costs and will look to lower spending levels to bolster their savings. Self-employed workers are expected to be the most vulnerable to rising debt burdens in 2023, as maintaining strong revenues will be challenging amid weak economic growth that is expected next year. Part-time workers and those in the gig economy are also highly vulnerable, as their inconsistent wages will make higher debt repayments challenging.
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