SKorea finance chief worries about inflation, debt

AP News
Posted: Jul 06, 2011 5:12 AM
SKorea finance chief worries about inflation, debt

Inflation, rising household debt and troubles in part of the banking sector are among factors weighing on South Korea's rapid economic recovery from the global financial crisis, the country's new finance minister said Wednesday.

"Consumer prices have remained high recently and low income groups are struggling to make ends meet," Bahk Jae-wan said told reporters from foreign news organizations in a speech.

"At the same time, the issue of increasing household debt and the ailing local savings banks has placed additional burdens on the economy," he said.

Bahk spoke after the government announced last week that South Korea's consumer price index rose 4.4 percent in June from the year before, while so-called core inflation, which strips out volatile agriculture and oil prices, also accelerated to rise 3.7 percent from the year before.

Also late last month, financial regulators announced additional measures to deal with increasing household debt, such as setting up a system for ensuring that banks properly evaluate a borrower's ability to repay before offering a loan and introducing leverage regulations for credit companies.

South Korea's total household debt stood at 801.4 trillion won ($754 billion) at the end of March, growing 13 percent annually on average since the 1997-98 Asian financial crisis, according to the country's financial regulators. They attribute the increase to factors including low interest rates and overlending by financial institutions.

Bahk took over as head of the Ministry of Strategy and Finance in early June after President Lee Myung-bak made changes to his Cabinet in the wake of the ruling party's defeat in key parliamentary and other local by-elections in late April.

Bahk moved to the ministry from his previous post as head of the Ministry of Employment and Labor.

South Korea's economy, Asia's fourth largest, has grown for nine straight quarters through the first three months of this year after sharply contracting at the end of 2008.

Bahk noted that the economy is "recovering rapidly" and highlighted bright spots in the form of strong exports and growth in new jobs this year. But he added that not all of South Korea's citizens are benefiting.

"Many Koreans don't feel that these improvements have been reflected in their daily lives," he said.

The Bank of Korea's monthly survey of consumer sentiment for June found that South Koreans were overall less optimistic compared with the previous month, with sentiment regarding living standards, current domestic economic conditions and the future all falling.

The government late last month revised its outlook for the second half of this year, lowering its 2011 economic growth forecast to 4.5 percent from the previous one of about 5 percent and also said annual inflation would likely hit 4 percent, up from the previous forecast of about 3 percent.

South Korea has also been battling troubles at regional savings banks. Eight of the country's total of 105 such banks have been suspended this year, with one of those forced to temporarily cease operations having been sold to a government-owned financial institution, according to Ernst Lee, a spokesman at the Financial Services Commission.

Despite expressing concern about the situation in his speech, Bahk said later in response to a question that the government does not see the problem posing a major risk to the economy given the small portion of overall financial assets held by savings banks.