[Inside Chodong] SMEs Are Not Seeking Sympathy

[Asia Economy Reporter Kim Jong-hwa] Companies are being driven to the brink by the 'three highs' of high interest rates, high inflation, and high exchange rates. The economic outlook remains pessimistic, with the expectation that difficulties will persist into next year.

The Bank of Korea's base interest rate, which had been maintained at 0.50% since May 2020, started rising from 0.75% in August last year and has steadily increased to 2.50% at present. If inflation does not subside, the base rate will be raised further to tighten the money supply. As interest rates rise, the amount needed to repay debt increases, leading to reduced consumption and companies becoming more reluctant to take out loans or invest. When consumption and investment decline, the economy contracts further.

The exchange rate is also on a continuous downward trend for the Korean won against the dollar due to the US interest rate hikes. When importing raw materials, the amount paid in won increases, causing cost and price rises, which in turn leads to further interest rate hikes, creating a vicious cycle. Although the economic downturn is a global phenomenon, the fragile parts of our economy become even more exposed during harsh times.

The number of 'zombie companies'?those unable to cover interest expenses through operating activities?continues to rise, and the number of small and medium-sized enterprises (SMEs) experiencing severe financial difficulties is also increasing. According to the 'Corporate Restructuring System Improvement Plan' report released last week by the Korea Economic Research Institute, the number of domestic zombie companies last year was 2,823, an increase of 540 (23.7%) from 2,283 in 2019. The number of employees working at zombie companies rose by 26.7% during the same period to 313,725.

The financial difficulties of SMEs have become particularly severe. The number of zombie companies among mid-sized and large enterprises increased by 15.4%, from 389 in 2019 to 449 last year, while SMEs saw a 25.4% increase from 1,891 to 2,372 during the same period.

SMEs standing at the crossroads of survival are sending out structural distress signals as if grasping at straws. They are appealing for measures such as easing labor shortages, introducing a delivery price linkage system, supporting carbon neutrality, and assistance in establishing stable production systems, citing the hardships caused by the 'three highs.'

Despite the economic crisis, the government has neither prepared swift countermeasures nor shown empathy for the industry's desperation.

The cost of relocating the presidential office to Yongsan skyrocketed from the initially estimated 50 billion won before the inauguration to 120 billion won. Additionally, the 87.8 billion won budget for constructing a new state guesthouse, which would have been unnecessary if the Blue House had been used as is, was included in next year's budget proposal but faced public criticism for wasting taxpayers' money and was ultimately completely withdrawn.

Meanwhile, the budget for SMEs was cut. The Ministry of SMEs and Startups' budget for next year is 13.6 trillion won, a 28% decrease from this year. The temporary increase of about 4.9 trillion won previously provided to small business owners and self-employed individuals has been removed, and the budget for the mother fund, through which the government invests in venture capital to foster SMEs and startups, has been reduced by 40% to only 313.5 billion won.

Regulatory improvements are also disappointing. At the regulatory reform grand discussion chaired by Prime Minister Han Duck-soo last month, most ministries expressed a stance of "not accepting" regulatory changes requested by SME representatives, except for those already preparing related legal amendments. This conclusion comes from meetings with entrepreneurs across various sectors and reporting on the relevant ministries. If this is the case, what is the point of calling busy entrepreneurs together and holding a grand discussion with much fanfare?

Simply listening provides comfort, and just talking offers healing, but that is limited to my personal concerns. For entrepreneurs in crisis, what is urgently needed is not handshakes and photo events but swift and practical financial support and institutional improvements.

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