Economic quadruple whammy weighs on SMEs

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By Yi Whan-woo

A quadruple whammy of soaring inflation, the Korean won's plummeting value against the U.S. dollar, sharply rising interest rates and demands for wage hikes are dealing a blow to small and medium-sized enterprises (SMEs), which are more susceptible to the economic crisis than conglomerates.

According to recent data compiled by the Korea Industrial Complex Corp., a total of 1,813 SMEs housed in state-owned industrial complexes have closed down temporarily or permanently over the past five years.

In particular, the pace of the SMEs closing their operations accelerated over the cited period ― 133 in 2017, 171 in 2018, 333 in 2019, 494 in 2020 and 681 in 2021.

The figure for the first five months of this year increased by 36 percent year-on-year to 218.

Separate data released by the Korea Small Business Institute showed 379 cases of SMEs filing for bankruptcy as reported in May, up 10 percent from a year earlier.

“Filing for bankruptcy is the last possible measure to be taken by financially troubled companies in general, and in that regard, multiple SMEs can be said to be undergoing extreme hardships,” the institute said.

Lee Jung-hee, an industrial economics professor at Chung-Ang University, expressed a similar view. “SMEs have already suffered a sharp fall in profitability due to the pandemic and the latest inflation is making their burden no longer bearable,” Lee said.

The business outlook for SMEs remains bleaker, according to a survey carried out by the Federation of Korean Industries (FKI).

Some 59 percent of 500 small business owners who took a survey responded that they anticipate their sales in the second half to dwindle from a year earlier, while 33 percent of the 500 answered that they are considering shutting down their business in the second half of the year.

The gloomy outlook comes as inflation, which hit a nearly 24-year high of 6 percent in June, is pushing manufacturing costs upward.

The problem is getting more serious for importers, as the Korean currency tumbled to 1,300 won against the dollar, increasing the costs of raw materials purchased from abroad.

Under the circumstances, more SMEs need to rely on bank loans to maintain their business.

However, borrowing from banks is becoming increasingly burdensome, too, as the Bank of Korea (BOK) is moving faster on hiking the key interest rate, increasing it by 1.25 percentage points this year alone.

The BOK especially carried out an unprecedented “big step” of increasing the benchmark interest rate by half a percentage point to 2.25 percent in July.

This big-step hike, according to the Korea Chamber of Commerce and Industry (KCCI), may increase the financial burden for SMEs to 2.8 trillion won ($2.14 billion) overall.

The inflation and other tough living circumstances are resulting in demands for wage increases among salaried workers.

The minimum wage for next year is set to increase 5 percent to 9,620 won. Employers accordingly will need to take that into account in negotiations for wage increases.

“Intervention by the government will be crucial to prevent SMEs from giving up on their businesses,” Lee said.