Small and Medium Enterprises Face Widening Losses for Third Consecutive Quarter... Debt Only Increases

Woori Financial Research Institute '1Q SME Performance Trends and Outlook'
Operating Profit Margin -3.4%... Three Consecutive Quarters of Losses
Increase in SME Loan Volume and Delinquency Rate

The profitability of small and medium-sized enterprises (SMEs) in South Korea has sharply deteriorated, with losses widening for the third consecutive quarter.

According to the '2023 Q1 SME Performance Trends and Outlook' report released by Woori Financial Management Research Institute on the 12th, the combined sales of 657 non-financial listed SMEs amounted to 8.3 trillion KRW, and operating profit recorded a loss of 279.2 billion KRW. The operating profit margin was -3.4%. This marks the third consecutive quarter of losses following -0.1% in Q3 2022 and -1.3% in Q4 of the same year.

The report explained, "Among the total 657 companies, 312 experienced negative growth compared to the same period last year." It further analyzed, "While the operating profit margin of all listed companies improved to 3.5% in Q1 from 2.0% in the previous quarter, the margin for listed SMEs declined during the same period."

The sales growth rate of non-financial listed SMEs has also been on a downward trend since Q1 last year. It continuously fell from 27.2% in Q1 last year to just 7.8% in Q1 this year. The report stated, "The relatively weakened profitability of listed SMEs is due to their limited ability to pass on high cost burdens to prices."

With the disappearance of the COVID-19 special demand, especially in healthcare and IT sectors, demand has decreased. Sales of diagnostic kits sharply declined, and PC sales dropped as remote work was scaled back. The materials sector also stagnated. Steel imports decreased more than expected due to sluggish construction activity in China. Prices of raw materials such as iron ore and natural gas, which had been declining since Q3 last year, were reflected with a lag in price reductions for steel and chemical products, causing related SMEs' sales to contract.

The report expects the slowdown to continue through Q2 and Q3 this year, with a turnaround beginning in Q4. "As financial market conditions improve, companies' financing situations will become smoother," it said, adding, "With active economic stimulus measures in major countries including China, export performance of domestic parts and equipment companies with a high export ratio is expected to recover."

Meanwhile, the scale of loans to SMEs is steadily increasing. As of June, loans to SMEs (including sole proprietors) from the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) totaled 609.1013 trillion KRW. This is an increase of 27.2706 trillion KRW compared to June last year (581.8307 trillion KRW). According to the Financial Supervisory Service, the delinquency rate on SME loans at domestic banks was 0.46% as of April, up 0.17 percentage points from a year earlier.

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