Large and Small-Medium Enterprises Struggling with Interest Burden

Debt Left from COVID-19... Financial Support Policies Urgently Needed

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With the base interest rate rising for two consecutive months, companies' interest burdens have increased. Considering the international situation and economic environment, the trend of interest rate hikes is expected to continue, heightening companies' concerns. Domestic small and medium-sized enterprises (SMEs) and small business owners are facing the challenge of increased financial costs due to interest rate hikes, especially as the effects of COVID-19 have yet to fully subside.

The SME sector is worried that continuous interest rate increases could lead to liquidity crises for individual companies. According to the Korea Federation of SMEs, SMEs are vulnerable to interest rate hikes, as a 1 percentage point increase in the base rate raises interest expenses by 8.48 percentage points relative to operating profit. Considering that the base rate has been raised by 0.75 percentage points in three increments this year, SMEs' interest cost burdens have sharply increased in a short period. Moreover, SMEs are facing intensified management difficulties due to rising raw material prices and economic downturns.

Small business owners are also expressing difficulties. The immediate negative impact of interest rate hikes contributed to a 7.4% decrease in manufacturing startups in the first quarter compared to the previous year. Industry voices are united in calling for active financial support policies to mitigate the shock of interest rate hikes. A representative from the Korea Federation of Small and Medium Business stated, "The debt and loan burdens accumulated during the COVID-19 period remain significantly high and have not yet recovered. While interest rate hikes are unavoidable, comprehensive long-term measures addressing the debts of small business owners and self-employed individuals are necessary to eliminate potential financial instability triggers."

Large corporations are not exempt from these challenges. Interest rates have continued to rise this year, and with the United States maintaining a tight monetary policy stance, further rate hikes are expected. According to the Federation of Korean Industries (FKI), if the procurement interest rate rises by 3 percentage points due to base rate increases, one out of three large companies could become a marginal company. Additionally, it is analyzed that each 1 percentage point increase raises corporate interest burdens by approximately 9 trillion won. Lee Sang-ho, head of the FKI Economic Policy Team, said, "In the current situation of rising household and corporate debt, rapid interest rate hikes will increase the interest burden on financially vulnerable groups. Especially if marginal companies, which struggle to cover interest with operating profits, deteriorate, it could cause significant damage to the Korean economy."

There are somewhat mixed forecasts depending on the industry. A representative from the automotive industry said, "Due to interest rate hikes and global instability, the possibility of inflation has increased, raising concerns about contraction in domestic consumer markets. In particular, interest rate hikes could affect installment rates for car purchases, increasing the burden on customers." A representative from a large corporation commented, "The pace of interest rate hikes feels rapid. We are considering revising future management strategies in line with the scale of the rate increases." On the other hand, a representative from the shipbuilding industry said, "Interest rate hikes have been accompanied by a rise in the dollar's value, which could positively impact profitability for industries that receive payments in dollars."