[Inside Chodong] Corporate Crisis... What Preparations Has the Government Made?

[Asia Economy Reporter Kim Jong-hwa] Winter is coming. This phrase, widely known from the American drama , which concluded its eighth season in May 2019, resonates now. Although I want to insist it is still autumn, feeling the increasingly chilly wind, I sense that autumn will pass by swiftly and winter will soon arrive this year as well.

Winter is also coming to the Korean economy.

According to the economic growth forecasts for 2022 and 2023 released by the International Monetary Fund (IMF) on the 11th, the United States is expected to grow by 2.6% this year and 2.0% next year, while the Eurozone’s growth is projected to sharply slow from 3.1% this year to 0.5% next year. South Korea’s economic growth rate is forecasted at 2.6% this year and 2.0% next year, indicating that the economic situation will be tougher next year than this year.

International credit rating agency Fitch projected South Korea’s economic growth rate at 1.9% for next year, and the Bank of Korea suggested 2.1%, while adding that the actual figure may fall below the forecast.

If the grand discourse of the global macroeconomy does not resonate well, these statistics are worth noting.

Many companies have exhausted their stamina while enduring rising raw material prices caused by COVID-19, the global logistics crisis, and the Russia-Ukraine war. Especially small and medium-sized enterprises (SMEs) have recently faced steep interest rate hikes, making it difficult to even pay interest on borrowed funds.

According to five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup), the balance of corporate checking accounts opened at these banks was 3.9494 trillion won as of the end of last month. This represents a 30.9% decrease from over 5.7 trillion won at the end of last year. The number of checking accounts also declined by about 580, from 34,449 at the end of last year to 33,870 at the end of last month.

Checking accounts are deposit accounts opened by corporations and individual businesses that need to frequently deposit and withdraw relatively large sums of money, after paying a deposit guarantee to the bank. Within the deposit balance or the contracted overdraft limit, companies can issue checks and promissory notes, so these accounts also function as a kind of overdraft facility for businesses.

The decrease in checking account balances indicates a tightening of short-term liquidity for companies, meaning that SMEs unable to withstand financial difficulties due to rising base interest rates are facing bankruptcy risks.

On the 29th of last month, the Small and Medium Business Research Institute released a study showing that if the base interest rate reaches 3.0%, the number of marginal small business owners who cannot even cover interest expenses with operating profits for more than a year will reach 1.24 million. On the 12th, the Bank of Korea’s big step?a 0.5% base rate hike?made a 3% base interest rate a reality for the first time in 10 years.

Researcher Jeong Eun-ae of the Small and Medium Business Research Institute emphasized in the report, "Small business owners, who account for over 90% of all enterprises, have very large-scale defaults when they occur, and the ripple effects on society are also significant. Since defaults among small business owners can lead to household insolvency, it is urgent to proactively respond to risks by investigating and preparing countermeasures for distressed small business owners."

While the government has allocated 459.3 billion won for the construction of the President’s second office in Sejong City, it has boldly cut budgets related to SMEs, including a 40% reduction in the Small and Medium Venture Business Promotion Fund and a 30.8 billion won cut in commercialization funding support for startups in the leap stage (3 to 7 years) to overcome the valley of death. I want to ask the government: Winter is coming, so what preparations are in place?

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