The Rise of ‘Zombie Borrowers’ and the Slowing Korean Economy
South Korea is facing a growing economic challenge: the rise of “zombie borrowers.” These are individuals with high levels of debt, defined as having a debt service ratio (DSR) exceeding 50%, who are able to consistently meet their loan obligations but are significantly curtailing their spending. This trend, highlighted in a recent report by the Bank of Korea (BOK), is contributing to a structural slowdown in consumption and raising concerns about long-term economic growth.
Defining the ‘Zombie Borrower’
Unlike borrowers who default on their loans, zombie borrowers remain current on their payments. However, the sheer weight of their debt burdens forces them to drastically reduce discretionary spending. The BOK report, authored by Eui-jin Lee and Sim Il-hyeok, defines these borrowers as those with a DSR above 50%. Currently, approximately 15% of all borrowers in South Korea fall into this category, with many having taken out substantial mortgages.
The Impact on Consumption
The impact on consumption is significant. Zombie borrowers exhibit consistently lower spending growth rates compared to those with more manageable debt levels. One year after taking on high debt, their consumption growth slows by roughly 1%. This gap widens to 1.5% after two years, and reaches 2.0% after three years. The higher the DSR, the more pronounced the reduction in spending. For those with a DSR exceeding 70%, the reduction in consumption growth approaches 2.0% within two years.
Why ‘Zombie’ Borrowers are Different from Defaulted Borrowers
Interestingly, the reduction in spending among zombie borrowers is more prolonged than that of borrowers who actually default on their loans. While defaulted borrowers may initially cut back on spending, their consumption often rebounds after a year as debts are resolved. Zombie borrowers, however, continue to restrain their spending for an extended period, often due to ongoing high debt burdens and limited access to credit.
The Role of Non-Bank Financial Institutions
A key factor contributing to the persistence of zombie borrower status is the role of non-bank financial institutions. These institutions often provide loan extensions and new loans to borrowers struggling with debt, allowing them to avoid default but perpetuating their high debt levels. Here’s partly driven by a desire among financial institutions to avoid the regulatory burdens associated with loan defaults.
The Limited Impact of Asset Appreciation
Even increases in asset values, such as home prices, offer limited relief to zombie borrowers. While their net worth may increase on paper, the substantial debt obligations outweigh any benefits from asset appreciation, leaving them with limited disposable income.
Policy Implications and Future Trends
The BOK report emphasizes the need for stronger management of both defaulted and zombie borrowers. Stricter DSR regulations, applied consistently across both bank and non-bank financial institutions, are crucial. Carefully designed debt relief programs, targeted at vulnerable groups like young people and low-income households, could potentially stimulate consumption, but must be implemented cautiously to avoid moral hazard.
Did you know?
The term “zombie borrower” originates from the idea that these individuals are technically alive (able to repay their debts) but are barely functioning economically, existing in a state of financial stagnation.
FAQ
Q: What is a ‘zombie borrower’?
A: A ‘zombie borrower’ is someone with a high debt-to-income ratio who is current on their loan payments but significantly reduces their spending due to debt burdens.
Q: What is the DSR?
A: DSR stands for Debt Service Ratio, representing the percentage of a borrower’s income used to cover debt repayments.
Q: Why are zombie borrowers a concern?
A: They contribute to a slowdown in consumption, which weakens economic growth.
Pro Tip
If you are struggling with high debt, consider seeking financial counseling to explore options for debt management and budgeting.
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