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By Lee Kyung-min
Key rate hikes by the Bank of Korea will lead to higher insolvency risks for small and medium-sized firms (SMEs) in the textile, paper and metal industries, which rely on clients other than the country's top business conglomerates for 65 percent of their total sales, a state-run think tank said Sunday. SMEs account for about 37 percent of the Korean manufacturing sector's total revenue and contribute over 39 percent in added value.
Small firms with limited means of issuing stocks and corporate bonds will have to bear higher borrowing costs from a smaller number of lenders, compared to their larger counterparts that have greater access to financing, according to the Korea Institute for Industrial Economics & Trade (KIET).
Policy measures including extending repayment deadlines for borrowers and fixing their borrowing rates should be able to help offset the central bank's highly probable hiking of the rate by up to 75 basis points, it added.
The state-run think tank said the key rate will be raised to at least 2 percent this year, up from the current 1.25 percent, driven by rising inflation and rapid monetary policy normalization by the U.S. Federal Reserve.
If the key rate is increased by 1 percent, the borrowing rate for small firms will rise 0.64 percent, whereas the figure for their larger counterparts will be limited to 0.57 percent. Commercial lenders will subsequently charge small firms a long-term interest rate 0.52 percentage points higher than larger firms.
"Small textile, paper and metal processing companies will be hit particularly hard by the central bank's rate hikes. Their possible insolvencies could have a knock-on effect across the entire manufacturing and financial industries, amplifying the financial shock," it said.
"The government should increase financial support, including the extension of loan maturity, deferred debt repayment and fixed-rate loans, in a package of preemptive measures to help the small firms weather the pandemic-induced tightening of business conditions," the institute said.
Industry-wide structural reforms should be pursued to drive out firms with shaky financial conditions that long predate the pandemic, a critical step to revitalizing the economy, it added.
"Unhealthy firms that are unable to pay interest on their loans will have a lower chance of being granted government policy assistance, in gradual stages as the pandemic response develops. How they are determined unviable in the long term would be best calibrated by policymakers," it added.
Fed Chairman Jerome Powell said late last month that the U.S. central bank will continue hiking the interest rate until inflation comes under control, adding that the rate could rise by up to 50 basis points if necessary.
