Warnings of gloom pile up amid interest rate hikes... "Serious impact on SMEs and exports"

[Asia Economy Reporter Oh Hyung-gil] As the base interest rate hikes that began in the second half of last year continue, concerns are growing that the number of small and medium-sized enterprises (SMEs) being pushed to the brink will increase, and that export profitability will deteriorate, causing significant damage.

At its monetary policy meeting on the 14th, the Bank of Korea's Monetary Policy Committee raised the base interest rate by 0.25 percentage points from the current 1.25% to 1.50%. Since the first rate hike in 15 months on August 26 last year, the base rate has been raised four times in total, including in November, January, and April of this year, resulting in a cumulative increase of 1 percentage point.

Due to the rate hikes, SMEs have taken on considerable financial burdens. In particular, it is analyzed that SME sectors such as textiles, pulp and paper, and metal processing will be directly hit.

According to the report "The Impact of Base Interest Rate Increases on Major Manufacturing Industries and Implications" released by the Korea Institute for Industrial Economics and Trade, when interest rates rise by 1%, the loan interest rate for SMEs increases by 0.64%, while for large corporations it rises by 0.57%. This indicates that SMEs are more sensitive to changes in loan interest rates.

Among manufacturing industries, textiles, pulp and paper, metal processing, and other manufacturing sectors have SME shares exceeding 65% based on sales and over 70% based on value added. The proportion of marginal firms within these industries also exceeded 10%.

The report pointed out, "Industries with a high proportion of SMEs and marginal firms are likely to experience an overall increase in insolvency due to the negative impact on interest coverage ratios and the rise in the share of marginal firms within the industry following the base interest rate hike."

To minimize the negative effects of the base interest rate increase, the report suggests that in the short term, financial support policies such as additional maturity extensions, repayment deferrals, and medium- to long-term fixed-rate loan products related to corporate loans, which are a major funding source for SMEs, are necessary.

It also added that for a gradual industrial restructuring, temporary marginal firms caused by COVID-19 should be identified and selectively supported step by step.

[Image source=Yonhap News]

There is also a forecast that if the United States embarks on a full-scale interest rate hike, South Korea’s export profitability could worsen due to increased import costs.

According to the report "The Impact of U.S. Interest Rate Hikes on Our Exports" by the Korea International Trade Association’s Institute for International Trade and Commerce, the U.S. interest rate hikes lead to a rise in the won-dollar exchange rate, increasing dollar-denominated import costs and thereby worsening export profitability.

This year, the won-dollar exchange rate has surpassed 1,200 won, increasing the burden of raw material imports in won terms. Since primary products and intermediate goods account for 73% of South Korea’s total imports, the recent sharp rise in international raw material prices, combined with exchange rate increases, is considered a factor that raises the burden of raw material imports.

Hong Ji-sang, a researcher at the Korea International Trade Association, said, "Recently, global inflation has structurally prolonged due to cost factors rather than demand factors, and there is growing momentum for a big step (0.5 percentage point) rate hike by the U.S. in May. In preparation for the steep U.S. rate hikes, it is necessary to proactively prepare measures to ease corporate loans and provide multifaceted support to reduce ancillary costs for export companies, such as maritime freight, to enhance cost competitiveness."

This content was produced with the assistance of AI translation services.