[Hanaeun Big Step] Companies' Interest Payments This Year Increase by 3.9 Trillion Won... SMEs and Small Business Owners "Survival Threatened"

Concerns Over Increasing Number of Zombie Companies
Additional Interest Burden of 1.1 Trillion Won for Large Corporations and 2.8 Trillion Won for SMEs

The photo is not directly related to the article. [Image source=Yonhap News]

[Asia Economy Reporters Donghoon Jeong, Chulhyun Kim, Chaeseok Moon] As the Bank of Korea took a 'big step' (a 0.5% increase in the base interest rate) for the first time in history, the burden on companies, already contracted due to the global economic slowdown and high exchange rates, is expected to increase further. It is feared that corporate loan interest payments due this year will increase by about 4 trillion won, and sales slowdown due to reduced consumption will also be inevitable.

According to the Bank of Korea and industry sources on the 13th, as the Monetary Policy Committee raised the base interest rate from 1.75% per annum to 2.25%, corporate loan interest payments this year are estimated to increase by 3.9 trillion won. According to a recent report released by the Korea Chamber of Commerce and Industry, of the 3.9 trillion won increase in interest, 2.8 trillion won is the burden on small and medium-sized enterprises (SMEs), more than double the 1.1 trillion won borne by large corporations.

Kim Cheongu, a researcher at the Korea Chamber of Commerce and Industry, pointed out, "Since the spread of COVID-19, the number of marginal companies that cannot even cover interest expenses with operating profits has greatly increased," adding, "We need to be cautious about short-term economic contraction, corporate financial burdens, and foreign capital outflows during interest rate hikes." In fact, the proportion of marginal companies in Korea last year was 16%, about 3.6 percentage points higher than 12.4% in 2019 before the COVID-19 crisis.

In particular, domestic SMEs and small business owners, who have increased their loans while enduring the COVID-19 pandemic, are complaining that the rapid interest rate hike threatens their survival. In a situation where corporate anxiety is already heightened due to supply chain disruptions and the resurgence of COVID-19, they are now burdened with financial costs due to the interest rate increase.

Lee Chang-yong, Governor of the Bank of Korea, is attending the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Kang Jin-hyung aymsdream@

According to a Bank of Korea survey, as of the end of last month, bank corporate loans reached 1,125.1959 trillion won. Of this, SME debt alone is 930.9196 trillion won, about 4.8 times that of large corporations at 194.2764 trillion won. According to the Korea Federation of SMEs, when the base interest rate rises by 1 percentage point, interest expenses as a percentage of operating profit increase by 8.48 percentage points, indicating SMEs' vulnerability to interest rate hikes. This means that SMEs, which have not recovered from the COVID-19 shock, face a survival threat due to increased interest burdens from the big step.

An SME official said, "In a situation where management difficulties are intensifying due to rising raw material prices and economic contraction, the big step is like adding insult to injury for companies," adding, "Active financial support policies are needed to mitigate the shock of the interest rate hike."

Even large corporations, which have mechanisms to diversify risks through financial assets, are not in an easy position. In a situation of increased global uncertainty, high inflation and exchange rate burdens combined with high interest rates inevitably become negative factors. An industry official said, "When interest rates rise by 1%, the combined effect of the increase in financial assets and the decrease in financial liabilities could result in a net effect," but added, "However, uncertainty due to demand reduction from economic contraction may increase." Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "Companies that operate with a lot of loans could be at risk," and suggested, "The government should consider policies such as tax support to help reduce costs."