Despite High Interest Rate Trend and Stabilizing Exchange Rates and Prices... 66% of Companies "Fail to Make Profits"

3% Base Interest Rate for 7 Months
Inflation Rate Falls to 4% Range After 1 Year
Foreign Exchange Reserves on the Rise

As South Korea's base interest rate has remained in the 3% range for seven months since entering it last October, inflationary pressures have eased and the exchange rate has stabilized, but corporate profitability is reportedly on a downward trajectory.

According to a recent survey conducted by the Korea Chamber of Commerce and Industry (KCCI) targeting 302 domestic manufacturing companies on the 'Impact of Prolonged High Interest Rates on Businesses,' 66.3% of respondents reported that they are either operating at a loss or at a breakeven point, failing to generate profits. The largest group, 31.0%, said their current business situation is at a breakeven point where profits and costs are equal; 24.3% reported having shifted into a loss-making situation, and 11.0% said their losses are deepening. In contrast, 33.7% of companies responded that they are steadily generating profits.

In a KCCI survey last September, the tolerable base interest rate level for companies to realize profits was found to be 2.91%, but the current base rate remains at 3.5%, exceeding that level by 0.6 percentage points. The persistence of a base interest rate in the 3% range is the first in 10 years since 2012, and the 3.5% rate is the highest since the 2008 financial crisis.

Due to the high interest rate trend, inflation has shown signs of easing. The consumer price index inflation rate in February was 4.2%, falling to the low 4% range for the first time in a year. It peaked at 6.3% last July, then hovered in the 5% range before dropping to the 4% range. The expected inflation rate in March also turned downward, registering 3.9%.

Concerns about exchange rate increases and capital outflows due to the interest rate differential with the United States have not materialized. Although the Korea-US interest rate gap widened to 1.5 percentage points following the US rate hike of 0.25 percentage points in March, foreign investors sold large amounts of dollars in the futures market, causing the exchange rate to decline. The won-dollar exchange rate, which peaked intraday at 1,444 won last October, has since shifted to a downward trend, fluctuating around 1,300 won. Foreign exchange reserves, which had decreased to $414 billion last October, have steadily increased and stood at $426 billion as of March.

56% of Companies Say “More Difficult Than Second Half of Last Year” … 71% Have Initiated ‘Emergency Tightened Management’

When asked about their current financial situation compared to the second half of last year, 56.3% of respondent companies said that difficulties have intensified due to high interest rates. Companies reporting a similar level to last year accounted for 29.3%, while only 12.7% and 1.7% said they had no difficulties or that their financial situation had improved, respectively.

Under the burden of high interest rates, companies have been tightening their belts as a last resort. In the September survey last year, only 20.2% of companies had prepared countermeasures against high interest rates, but in this survey, 71.0% of companies have implemented emergency tightened management measures to alleviate the burden. Meanwhile, 29.0% of companies reported taking no action.

The tightening management measures companies are taking include ▲saving on general administrative expenses such as consumables (71.8%), ▲reducing investments (24.9%), ▲freezing or cutting wages (11.7%), ▲reducing workforce through voluntary retirement or employment cuts (9.4%), ▲reducing factory operations and production (8.9%), and ▲selling idle assets (8.0%), in that order.

76% of Companies Unable to Utilize Government Support Measures

Although the government and local governments have introduced corporate support policies such as management stabilization fund loans and interest subsidy programs amid the high interest rate environment, the perceived effectiveness on the ground was low. When asked about the utilization of high interest rate support measures, 60.7% of respondent companies said, “I have never used them because I am unaware of the support programs,” and 16.0% said, “I know about them but have never used them.” Responses indicating “I use them but the effect is not significant” accounted for 17.3%, while only 6.0% said, “They are very helpful for management.”

The reasons for the low effectiveness of support measures were ▲limited eligibility (35.5%), ▲many companies unaware of the support measures (28.7%), ▲temporary fixes rather than fundamental solutions (28.4%), and ▲support scale too small compared to market demand (19.9%), in that order.

Under the current high interest rate environment, the support measure most desired by companies was a ‘shift in the high interest rate policy’ (58.7%). This was followed by ‘tax support and other cost reduction measures’ (26.0%), ‘expansion of loan guarantee support’ (8.7%), and ‘loan maturity extension and repayment deferral measures’ (6.6%).

Kim Hyun-soo, head of the Economic Policy Team at KCCI, pointed out, “With the trade deficit continuing for 13 months, a prolonged high interest rate environment could dampen consumer sentiment,” and emphasized, “It is a time when careful interest rate decisions are required to weigh the pros and cons of the rate hike trend and to avoid missing the timing for stimulating domestic consumption and economic recovery.”