KOREAN CONSUMER DEBT RAISES EYEBROWS.(Brief Article)

Two years ago, when signs of an economic slowdown emerged in South Korea, the government encouraged credit card use as a means of stimulating sales of consumer goods. Now, many analysts believe that the strategy worked too well, resulting in a mountain of consumer debt and a growing number of defaults.

Up until very recently, credit cards were issued with little investigation into the creditworthiness of applicants. As consumers with little experience managing credit went on a spending binge and household income dropped off as a result of the economic slowdown, the delinquency rate rose. At the outset of this year, about 16 percent of the working population of South Korea was in arrears on credit card payments.

Government-instigated debt restructuring programs could exacerbate the credit crunch during the first half of this year. Consumers who qualify for a bailout are making even more purchases in order to qualify for as much debt forgiveness as possible. Nevertheless, by midyear 2004, growth in credit card purchases should drop off.

Slow growth in credit card purchases will go hand-in-hand with slack demand for high-end durables. Overall sales of durable goods should show year-on-year gains in the range of 1 to 3 percent through the first quarter of 2004 before approaching the 5 percent mark in the third quarter.

Expenditure on household services started to show year-on-year gains late in 2003 and a sustainable growth pattern should emerge by the second quarter of this year. Service sector sales growth should rise until it reaches the range of 5 to 10 percent late in the year. That will have a favorable impact on overall internal demand because 45 percent of employment is supplied by the service sector. Real household income should rise as wage increases outpace inflation, and that will boost discretionary spending as 2004 progresses.