"Next Year’s Manufacturing and Service SMEs Expected to Struggle... Increase in At-Risk Companies Anticipated"

Junggiyeon Announces '2024 Economic Outlook and SME Issues'

Choi Se-kyung, Head of Policy Consulting Center at Korea Small and Medium Business Institute (KOSI). [Photo by Korea Small and Medium Business Institute]

The business conditions for small and medium-sized enterprises (SMEs) in the manufacturing and service sectors are expected to remain sluggish next year. The number of marginal SMEs unable to repay interest due to prolonged high interest rates and continued economic slowdown is also expected to increase rapidly.

Choi Se-kyung, head of the Policy Consulting Center at the Korea Small Business Institute (KOSI), stated this on the 19th at a symposium held at the Glad Hotel in Yeouido, Seoul, themed "2024 Economic Outlook and SME Issues." The 12th KOSI symposium was organized to identify key SME issues for 2024 and explore policy directions based on changes in the domestic and international macroeconomy, as well as political and social environments.

Choi predicted that the global economy will show a slow recovery next year due to the economic slowdown in the U.S. and China, changes in monetary policies of major global countries, and increased geopolitical conflicts such as wars. The Korean economy is expected to recover around 2%, driven by exports and facility investment, but various risk factors such as reduced household consumption capacity, labor shortages, and prolonged high interest rates make the outlook less optimistic for SMEs.

In the manufacturing and service sectors, a gap in sentiment between large enterprises and SMEs is expected. Choi said, "While the business outlook sentiment for large manufacturing companies is somewhat improving, negative sentiment is growing among SMEs," adding, "The service sector has also declined since the second half of this year, so the business conditions for manufacturing and service SMEs next year are negative."

The deepening polarization between large and small-medium enterprises is also a concern. Choi noted, "The size difference between large and SMEs, combined with industrial structural changes such as digital transformation and energy transition, is widening the labor productivity gap between them," and suggested, "It is necessary to double SME productivity from the current level through tailored policies based on SME characteristics."

The increase in SME debt scale and delinquency rates is another major threat to SMEs. Due to prolonged high interest rates, the number of marginal SMEs is expected to rise more rapidly next year. Marginal SMEs are defined as companies with an interest coverage ratio (operating profit/interest expense) below 100% for three consecutive years. This means they cannot cover interest expenses with operating profits and are unlikely to recover without external financial support. Choi expressed concern, saying, "With the end of COVID-19 special financial measures and the cumulative effects of high interest rates, loan delinquency rates for SMEs and small business owners are rising," adding, "The amount of non-performing loans on relatively low-interest SME policy funds is also increasing sharply, raising the risk of insolvency, especially among small business owners."

There were also concerns that innovation investment would shrink due to reduced government support for research and development (R&D). Choi emphasized, "To enhance the effectiveness of SME R&D support next year under the government's sound fiscal policy, the policy delivery system must be innovated," and stressed, "SMEs themselves also need to innovate by developing new technologies or drastically transforming their businesses."

During the comprehensive discussion following the presentation, Choi, along with Professor Noh Yong-hwan of Seoul Women's University, Director Ahn Seong-bae of the Korea Institute for International Economic Policy, Director Lim Young-joo of the Korea Federation of SMEs, and Research Fellow Kim Jun-hyung of the Korea Development Institute, discussed measures to stimulate the SME economy. Oh Dong-yoon, president of KOSI, said, "Next year, the Korean economy will inevitably face low growth due to deepening polarization, population decline, and labor-management and generational conflicts," and added, "I hope SMEs overcome challenges and grow through digitalization and globalization."

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