The so-called Buffett indicator — stock market capitalization divided by nominal GDP — has topped 200% for the first time. That suggests the equity market has expanded beyond the size of the broader economy. It has already surpassed Japan (186%) and China (71%), and is narrowing the gap with the United States (227%), the world’s largest market.
The market’s support looks increasingly fragile. Outstanding margin loans in South Korea hit a record 35.46 trillion won. Individual investors, drawn into a rally that has continued even amid wartime turmoil, are maximizing leverage and increasing their vulnerability to a sudden reversal.
This “shadow debt” is building alongside rising delinquency rates in the financial sector. The combined delinquency rate at the five major commercial banks rose to 0.40% in the first quarter. Delinquencies among small business owners and households are at their highest levels in eight to 10 years. A sharp rise in delinquencies in real estate and leasing points to a disconnect between asset-market gains and the everyday economy.
A deeper concern is the slide in the economy’s underlying potential growth rate. First-quarter GDP growth came in at 1.7%, a surprise rebound, but it also indicates the economy is running into a ceiling near its estimated potential growth rate of 1.71%. The OECD projects South Korea’s potential growth rate will fall to 1.57% next year, down from 3.6% 14 years ago.
Business sentiment is also weakening. April’s Composite Business Sentiment Index appeared to rebound, but excluding a one-off factor — lower inventories due to supply disruptions linked to the Middle East war — perceived conditions have declined for a second straight month. Behind strong exports, domestic demand and manufacturing sentiment are eroding.
External risks may be only beginning. Oil-price volatility and supply-chain disruptions tied to the Middle East war, along with the won’s real value falling to a 17-year low (real effective exchange rate 85.44), suggest a “Gulf shock” could intensify. If high interest rates persist longer than expected, accumulated bad loans could swell and trigger margin calls across asset markets.
The current stock-market boom is being built on debt. The government and financial sector should not miss the window for sound risk management by mistaking headline indicators for lasting strength. Past “Minsky moments” have ended painfully, underscoring the need for early cleanup of weak assets and structural reforms.
* This article has been translated by AI.
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