[Base Rate 3%] 'Big Step' Direct Hit... Both Large Corporations and Small Business Owners Struggle to Repay Interest (Comprehensive)

Declining Performance... Corporate Loan Interest Rates Expected to Reach 7%
"Monitoring Needed for Shipbuilding, Air Transport, Distribution, etc."
1,243,000 Vulnerable Small Business Owners at Risk

The Monetary Policy Committee of the Bank of Korea held a meeting on the 12th and decided to implement a 'big step' increase by raising the base interest rate, currently at 2.50%, by 0.50 percentage points at once. On this day, a notice of today's interest rate was posted on the exterior wall of a commercial bank in downtown Seoul. Photo by Moon Honam munonam@

#. Jo Jin-young (pseudonym), CEO of a lighting company operating in Goyang-si, Gyeonggi-do, says he has been running his company at a loss for the past five years. He imports key components from China to manufacture finished products and supplies lighting fixtures to construction sites, but recent soaring raw material prices have reduced profits, forcing him to rely on loans to keep afloat. Jo said, "The company needs to generate annual sales of 5 billion KRW to operate normally, but this year, I expect sales to be around 3.5 billion KRW, which is lower than that." He added, "It might be better to close the company quickly, but since this is the only work I know, I am holding on," and "I need to take out additional loans, but even that is not easy." The loan interest rate offered by his main bank recently soared to around 8%. With the base rate having been raised by 0.5 percentage points as of the 12th, it is obvious how much the interest burden will increase.

[Asia Economy Reporters Kim Jong-hwa, Sung Ki-ho, Kim Bo-kyung] On the 12th, the Bank of Korea's Monetary Policy Committee implemented a second 'big step' (0.50 percentage point hike), putting not only marginal and small businesses but also large corporations facing worsening second-half performance in a position where even repaying interest is difficult. There is even pessimism that 3 to 4 out of 10 domestic large companies could face management difficulties.

As corporate loan interest rates are expected to exceed 7%, and corporate bond rates, a key funding channel for companies, are also soaring, borrowing money has become even more difficult. On top of this, adverse factors such as a sharp rise in the won-dollar exchange rate, accelerated U.S. monetary tightening, and unstable global conditions are pouring in, but companies that had entered emergency management are unable to even gauge how to change their future management strategies.

According to the Bank of Korea, the interest burden on companies due to the big step is about 8.9 trillion KRW. The immediate increase in interest due to the base rate hike on that day alone reached 18 trillion KRW. Earlier, the Federation of Korean Industries surveyed the financial conditions of manufacturing companies among the top 1,000 companies by sales and found that the average base rate threshold at which operating profit can cover interest expenses was 2.6%. Looking at the proportion of companies by base rate threshold, 37.0%, or more than 3 out of 10 companies, responded that they already find it difficult to cover interest expenses with operating profit at the current base rate.

The Bank of Korea analyzed that if a 'baby step' (0.25 percentage point base rate hike) is taken, 5 out of 10 large companies will become vulnerable, and if the base rate reaches 3.0% with a big step, the number of vulnerable companies will reach 59.0%, meaning the majority of large companies will face a crisis.

The aviation industry among large companies has been hit the hardest. Already weakened financially due to COVID-19, they had been holding on through capital increases or corporate bond issuance. However, recent surges in exchange rates and fuel costs, combined with interest rate hikes, have turned the management situation critical.

The electronics and automobile industries are also anxiously concerned about potential damage from reduced purchasing power and consumption contraction. An automobile industry official said, "With global high interest rates maintained, especially in the U.S. market where many vehicles are purchased on loans, the entire market could shrink." The electronics industry also stated, "If high interest rates and high exchange rates continue, there is concern about stagflation," adding, "Ultimately, it is not just the interest rate hikes and high exchange rates themselves but the macroeconomic crisis's adverse effects on management that we are worried about."

The soaring corporate bond rates, a key funding channel for companies, are also worsening financial conditions. As the base rate hike pushes up government bond yields, corporate bond issuance rates are rising sharply. As of the previous day, the 3-year unsecured corporate bond rate for AA- rated companies recorded 5.44% annually, up 2.98 percentage points from 2.46% at the beginning of this year.

Korea Credit Rating recently reported that when recalculating the ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to interest expenses for 18 industries next year under the assumption of interest rate hikes, the ratio decreases from 10.8 times to 8.3 times. This means corporate profits relative to interest expenses will drop from 10 times to 8 times, indicating an increase in interest expenses.

Korea Credit Rating estimated that industries such as shipbuilding, hotel duty-free, air transportation, distribution, private power generation, and shipping will continue to have lower ratios compared to other industries and labeled them as 'industries requiring monitoring.'

If interest rate reaches 3.0%, an additional 60,000 small business owners will face marginal situations

Small business owners are also struggling with high interest rates. Lee (surname), who has been running a restaurant in Geumcheon-gu, Seoul for three years, is distressed by rising loan interest. He complained that the interest on his variable-rate loan has nearly doubled recently. Although he hoped sales would improve as the COVID-19 spread eased, he is now battling high interest rates and high prices.

The Small and Medium Business Research Institute recently released a study showing that if the Bank of Korea raises the base rate to 3.0% with a 'big step,' 1.24 million small business owners could face bankruptcy risk. The institute estimated that when the base rate reaches 3.0%, an additional 60,000 small business owners will face marginal situations, bringing the total number of marginal small business owners to 1,243,000. Marginal small business owners are defined as those who cannot even cover interest expenses with operating profit for more than a year, indicating a state of insolvency.

Researcher Jeong Eun-ae, who conducted the study, said, "Small business owners, who account for more than 90% of all enterprises, have a very large scale of insolvency when it occurs, and the ripple effects on society are also significant." She emphasized, "Since insolvency among small business owners can lead to household insolvency, it is urgent to investigate and prepare countermeasures for insolvent small business owners to proactively respond to risks."

The small and medium business community issued a warning regarding the recent base rate hike decision. They urged the financial sector to refrain from excessive loan interest rate increases. Immediately after the base rate hike news was announced, the Korea Federation of SMEs released a statement expressing "serious concern over the Monetary Policy Committee's decision to raise the base rate by 0.5 percentage points twice in a row," and appealed that "small and medium enterprises are facing increasing difficulties due to prolonged COVID-19, soaring raw material prices, rising loan interest rates, and global economic downturns."

Regarding the increased financial burden on small and medium enterprises, the SME community voiced unanimous concerns. The Korea Federation of SMEs said, "The government should prepare active financial support measures such as expanding policy fund support to prevent temporarily distressed SMEs from collapsing, and the financial sector should refrain from excessive loan interest rate hikes beyond the base rate increase so that SMEs and small business owners pushed to the brink can endure."

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