[Urgent Survey of Top 1000 Companies] "Interest Rates Expected to Rise to 2.0~3.0%"

Asia Economy-Korea Chamber of Commerce Joint Survey
BOK May Take Big Step at July Monetary Policy Meeting
High Interest Rates and Exchange Rates Hinder Business Planning
Possibility of Consecutive Bankruptcies Among Marginal Firms

[Asia Economy Reporter Yoo Hyun-seok] The reason companies view the outlook for the second half of the year unfavorably is not only due to rising production costs caused by increased raw material prices but also because of sluggish demand and potential difficulties in financing resulting from rising interest rates. Additionally, the sustained high exchange rate is clouding corporate management perspectives. The situation is characterized by the 'three highs': high inflation, high interest rates, and high exchange rates.

On the 15th, a joint survey conducted by Asia Economy and the Federation of Korean Industries targeting the top 1,000 companies by sales revealed that companies are deeply concerned about the prolonged Russia-Ukraine conflict causing global supply chain instability, the occurrence of stagflation (economic stagnation with rising prices), increased capital procurement costs due to interest rate hikes, and the potential bankruptcy of marginal companies.

Currently, South Korea's base interest rate stands at 1.75%. The Bank of Korea has expressed its intention to maintain an aggressive stance on raising the base rate this year. The Monetary Policy Committee of the Bank of Korea raised the base rate in April and May. The market expects consecutive rate hikes in July and August as well. Companies also anticipate that the Bank of Korea will raise the base rate. Among the survey participants, only 27.5% expected the base rate to remain at or below 2.0% this year, while 42.1% anticipated an increase to between 2.0% and 3.0%.

Kim Ji-man, a researcher at Samsung Securities, explained, "Considering changes in U.S. monetary policy, the possibility of a big-step rate hike by the Bank of Korea is quite open. Given the determination to preemptively curb expected inflation, I believe the likelihood of a 50 basis point (1bp=0.01%) big-step hike at the July Monetary Policy Committee meeting has increased."

If interest rates rise, households are likely to face a double burden of rising prices and increased loan interest payments. This would naturally lead to reduced consumption, which could worsen corporate earnings.

The rising exchange rate is also becoming a burden for companies. On the 14th, the won-dollar exchange rate hit an intraday high of 1,292.5 won, setting a new yearly peak. While a higher exchange rate benefits export companies, those that need to import raw materials may experience deteriorating profitability. The increase in import prices, including crude oil, could ultimately lead to reduced consumption.

Companies also expect the exchange rate to remain high in the second half of the year. The appropriate exchange rate, as perceived by companies, was 1,150 to 1,200 won (43.1%). However, 56.9% of respondents anticipated the won-dollar exchange rate to exceed 1,200 won in the second half. Specifically, 26.5% expected it to be between 1,200 and 1,250 won, 25.5% between 1,250 and 1,300 won, and notably, 4.9% anticipated it to surpass 1,300 won.

The rising exchange rate and interest rates are factors that complicate corporate management planning. Cho Cheol, senior research fellow at the Korea Institute for Industrial Economics & Trade, stated, "(Exchange rate and interest rate) issues indeed have a significant impact on devising measures to address global supply chain problems. Since each company's situation is very different, it is difficult to generalize, but these problems should be seen as chronic and inherent."

In particular, some foresee that marginal companies may not be able to endure and could face bankruptcy. As interest rates rise, corporate borrowing costs also increase, potentially leading to companies unable to pay their interest. Kim Sang-bong, professor of economics at Hansung University, predicted, "Interest rate hikes can reduce corporate investment. Moreover, marginal companies may not be able to survive and could be liquidated."