By Kim Jae-kyoung
Staff Reporter

In 2008, local small- and medium-sized enterprises (SMEs) have gone through their worst year since the 1997-1998 financial crisis, hit hard by the fallout from the global credit crisis and recession.

However, the worst is yet to come. Even bigger challenges lie ahead in 2009. With the economic slump prolonged and a liquidity squeeze deepening, many of them are now on the verge of falling off the edge of the cliff in the months to come.

Nam Tae-jeong, 36, a salaried worker at a local broadcasting firm, recently visited his parents, who run a small business in Gwang-ju, South Jeolla Province, and was shocked that so many small firms there had shut down.

``I couldn't believe my eyes. I visited my hometown six months ago. Back then, most of them were open and doing business. But many of them went under just over the past six months,'' Nam told The Korea Times.

``My parents told me that most of the surviving firms are likely to follow suit if the economic slump extends further,'' he added. ``I doubt that the government recognizes the seriousness of small firms' situations in provincial areas.''

In a survey of 2,514 local SMEs nationwide from Nov. 3-18, the Industrial Bank of Korea (IBK) found that 22 percent of those surveyed responded that they won't be able to tide over current difficulties without support from the government.

``We have to pay attention to the fact that as many as 22 percent of respondents believed that they won't be able to stay afloat through self-rescue efforts,'' IBK Economic Research Institute President Cho Byeong-sun said.

``Smaller firms are suffering from the triple burden of sluggish sales, worsening profitability and a deepening credit squeeze,'' he added. ``These firms need not only macroeconomic policy support, such as rate cuts and foreign exchange stabilization, but a direct supply of emergency aid funds.''

Of those surveyed, 49.8 percent said that business conditions this year have worsened, with 34.4 percent predicting a further downturn next year, according to the survey.

The business survey index (BSI) for SMEs stood at 76.1 for next year. A BSI reading of less than 100 means that pessimists outnumber optimists.

In particular, 89 percent of respondents expect business conditions not to improve until the second half of next year, citing sales drops, economic uncertainty and declining profitability.

The key culprit behind growing difficulties for smaller firms is that the government's huge injection of liquidity into the banking sector has not been translated into liquidity for them, as banks are not channeling the money to firms on fears that new lending will generate more bad assets.

Money supplied to banks has returned to the central bank's safe as local lenders have deposited the liquidity right back into the central bank, while shunning extending new loans. The central bank has supplied around 20 trillion won to local banks since Lehman Brothers filed for bankruptcy in September.

``Despite the central bank's liquidity injection and rate cuts, banks have refused to supply liquidity to smaller firms on fears that their balance sheet stress will deepen further,'' a senior Bank of Korea (BOK) economist said, asking not to be named.

``Banks have now effectively stopped functioning as a source of capital to the economy, as they focus on shoring up their capital base while beefing up lending standards,'' he added.

According to the BOK, local banks' lending to SMEs stood at 148.9 billion won for the first 18 days of this month, a major setback from the previous month's 1.87 trillion won.

In addition, the central bank has cut the key rate by a total of 2.25 percentage points to a historic low of 3 percent since October but lending rates have not gone down in proportion to the key rate. Since October, lending rates backed by collateral for Kookmin, Woori, Shinhan and Korea Exchange Bank have fallen by only 1.8 to 1.9 percentage points.

Against this backdrop, the government has decided to set up a 20-trillion won bank recapitalization fund next month to help banks shore up their capital base so that they make more credit available to struggling SMEs.

kjk@koreatimes.co.kr