Money is becoming more expensive again. At one point, the market anticipated a period of interest rate cuts, expecting inflation to stabilize and the U.S. to ease its tightening measures, with South Korea following suit. However, the reality is different. Inflation remains stubborn, and currency exchange rates are unstable. Geopolitical risks from the Middle East and fluctuations in oil prices have kept the flames of inflation alive. While the global economy struggles to move past the era of low interest rates, the market is already shifting toward a time of more expensive money.
The pressing question is whether the South Korean economy is prepared for this change. For over a decade, South Korea has grown accustomed to cheap money. Households have purchased homes with loans, and businesses have increased investments based on low borrowing costs. Real estate prices have been built on liquidity, and the government has consistently used fiscal and financial support to cushion the impact of economic slowdowns. Instead of structural reforms, the focus has been on extending maturities and deferring repayments. As a result, the South Korean economy has become vulnerable to rising interest rates.
Warnings are already sounding from various sectors. The delinquency rate among banks is rising again, and the financial situation for small businesses and self-employed individuals is deteriorating. Household debt remains excessive relative to the size of the economy. The intertwined financial structures of mortgage loans, jeonse loans, and credit loans are sensitive to even minor changes in interest rates. When rates rise, interest burdens increase, leading to reduced consumer spending. A contraction in domestic demand results in lower sales for self-employed individuals, which can lead to delinquencies and business closures. Tightening is not just a numerical issue; it directly impacts livelihoods.
The corporate sector is also under pressure. While large corporations can withstand challenges due to cash flow and overseas procurement capabilities, small businesses face a different reality. The simultaneous impact of high interest rates, high exchange rates, and high costs can lead to an increase in firms unable to cover interest payments with their operating profits. Companies that have relied on low interest rates and policy financing will now face the market's harsh evaluations. In an era of rising money costs, unprofitable investments, debt-fueled expansions, and management reliant on real estate collateral will no longer be viable.
The financial sector must also tighten its grip. The period of rising interest rates presents both opportunities and risks for banks. While interest margins may widen, an increase in defaults among vulnerable borrowers could erode profits due to higher provisioning costs. There is also a risk of simultaneous instability in real estate project financing, loans to self-employed individuals, small business loans, and second-tier financial institutions. Financial authorities should not be complacent by merely observing average delinquency rates. Crises often begin in the hidden weak links below the average.
Policy responses must also evolve. The past approach of lowering interest rates and increasing liquidity to support the economy is no longer a panacea. In an environment of unstable prices and exchange rates, hasty easing could exacerbate the depreciation of the won and increase capital outflow pressures. Conversely, excessive tightening could amplify the vulnerabilities of households and businesses. What is needed is a measured approach and targeted responses. High-risk loans should be addressed early, while providing tailored support to viable businesses and vulnerable groups. Policies aimed at rescuing all debts ultimately create larger problems.
Real estate policies must also be restructured to align with the tightening era. Easing loan regulations, expanding jeonse loans, and stimulating demand through tax relief to prop up housing prices is risky. As long as the expectation persists that real estate prices will rise faster than interest rates, the household debt issue will remain unresolved. Ensuring housing stability should not rely on increasing debt but should focus on normalizing supply, enhancing transparency in the rental market, and curbing excessive leverage.
While tightening is painful, it also presents an opportunity to eliminate bubbles and redirect resources to productive areas. The government must clarify its fiscal and financial priorities, businesses should move away from debt-dependent management, and households need to abandon the belief that asset prices will always rise. For South Korea to pass this test, a realistic preparation is necessary rather than blind optimism. It is essential to assess the quality of debt, strengthen financial safeguards, and shift the foundation of growth from real estate and liquidity to productivity and innovation. The era of tightening has already returned. The question is whether we have the courage to acknowledge and prepare for it.
* This article has been translated by AI.
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