South Korea’s central bank warns of rising small business debt risks – report

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SEOUL: South Korea’s central bank has warned that debt repayment risks will rise sharply for small business owners next year, according to a semi-annual financial stability report released Wednesday.

The Bank of Korea (BOK) estimated in the report that the debt service ratio (DSR) of small business owners, or the ratio of interest and principal payments to disposable income, would reach 46.0% in 2023, after falling to 38.5% in 2022 from 40.0% in 2021.

The government’s reimbursement of COVID-related losses and a recovery in demand as social distancing restrictions are lifted will offset rising interest rates and the expiration of emergency loan programs this year, said the BOK.

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However, the bank also sees “a possibility of a sharp increase in repayment risk next year, particularly among the lower income class”.

By income class, the BOK estimated that the RSD would increase from 34.5% in 2022 to 48.1% in 2023 for the lowest 30% incomes, from 38.6% to 47.8% for incomes average and from 39.5% to 44.4% for the top 30%.

The government’s special loan program that extends debt maturities and defers repayments for small businesses and the self-employed affected by the pandemic expires in September.

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South Korea has since the end of April removed all restrictions related to COVID-19, except for the requirement to wear masks indoors.

Last month, the government prepared a supplementary budget totaling 62 trillion won ($47.94 billion) to repay losses to small businesses due to the restrictions.

Financial support programs should shift from “liquidity support” to “solvency support”, such as measures to help restructure debts or close businesses, the BOK added in the report.

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The central bank said on Tuesday that it expects inflation to be higher than the previous projection and that it will closely assess debt service charges to determine whether an interest rate hike of half a percentage point in July was appropriate.

Last month, the BOK raised interest rates by 25 basis points to 1.75%, the highest since mid-2019, joining a global wave of central bank policy tightening to deal with price spikes not seen in decades.

($1 = 1,293.2000 won)

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