Moody's: Korea's new measures to stem household debt are credit positive

Moody's Investors Service says that Korea's (Aa3 positive) latest measures to contain the country's high levels of household debt will have a positive long-term effect on financial stability and ultimately support the sovereign credit profile.

But increased restrictions on mortgage lending will pose downside risks to GDP growth in 2016.

Moody's conclusions were contained in its just-released report on Korea, entitled "Korea, Government of: Tighter Household Debt Management Poses Downside Risk to Growth in 2016."

According to the 22 July announcement, the Korean government will increase target shares for fully amortizing mortgages and fixed rate loans, and urged lenders to focus more strictly on households' repayment ability, effective from January 2016.

From September, the authorities will also strengthen rules governing and monitoring of the non-bank sector. The measures follow the launch of a mortgage refinance program in March.

Korea's households have increased their borrowing over the past decade and have debt levels similar to some of the most indebted advanced economies, at around 73% of GDP as of the end of 2014.

Moody's does not view the high levels of household debt as posing a systemic risk given that most debt is held by high-income households, whose financial assets are worth more than double their liabilities.

Under the new measures, households will have to make principal payments toward fixed-rate mortgages on a monthly basis, while interest-only bullet loans merely require interest payments until the end of the loan term.

The overall amount to be repaid is likely to be lower under the new structure, alleviating potential longer-term risks to household financial stability, says the rating agency.

However, the temporal distribution of the payments will likely place additional downward pressure on consumption and GDP growth in the near term, at a time of already weak domestic demand, particularly since private consumption constitutes around half of nominal GDP.

Weak external demand amid slower global growth, combined with dampened domestic demand in the second quarter as a result of the recent outbreak of Middle East Respiratory Syndrome (MERS), has led Moody's to lower its forecast for real GDP growth to 2.7% this year, and 3.0% in 2016.