Swelling debt at a rising number of mom-and-pop businesses in South Korea is adding to the challenges of an economy that is already burdened by record household borrowing and the restructuring of its once-mighty shipyards.
Debt of the self-employed has surged 9 percent over the past 12 months to an all-time high of 256 trillion won (US$226.2 billion), the Bank of Korea said.
That makes it more than one-third the size of household loans, which might also contain some hidden borrowing for small enterprises, the central bank said.
What most worries South Korean policymakers is that only 30 percent of small businesses survive more than five years, and many of the people starting these enterprises have done so after being laid off because of corporate restructuring. They often lack business skills and are trying to find a way to make ends meet and save enough for retirement.
Bank of Korea board members noted the need to monitor small business debt at a policy meeting last month, minutes showed.
Lawmakers from both major parties have recently warned of rising default risks of mom-and-pop ventures due to high competition and slowing economic growth rates.
“Many of those who start small businesses in [South] Korea are middle-aged workers who left companies, either voluntarily or unwillingly, and are unprepared,” said Jun Sung-in, an economics professor at Hongik University in Seoul. “A lot of them fail in a year or two. They suffer more than those employed at companies during economic slowdown.”
Economists forecast South Korea’s economy will grow 2.6 percent this year and 2.7 percent next year, lower than projections by the central bank and the government. This growth rate, while better than most developed economies, compares with average annual growth of 3.6 percent over the previous 10 years.
Loans to mom-and-pop businesses are similar to household debt in that the repayment burden falls on an individual, not a company. Yet they have not been as strictly screened as they could be, because so far default rates have been declining.
This downward trend might change as the self-employed see their income and profitability deteriorate, said Jean Lim, a research fellow at the Korea Institute of Finance.
The number of self-employed people rose by 86,000 last month, a second monthly gain after years of steady decline, South Korean National Statistical Office data showed.
The recent increase was led by small retailers and restaurants, and was concentrated in Gyeonggi Province near Seoul and Gyeongsang Province at the southern end of the peninsula, where many ailing shipbuilders are based.
Daewoo Shipbuilding & Marine Engineering Co Ltd and Hyundai Heavy Industries Co Ltd — which have been going under restructuring and layoffs — both have operations in Gyeongsang.
The Korea Institute of Finance said in a report this month that the ratio of financial debt versus disposable income is higher for the self-employed, at about 146 percent. For regular employees it is 96 percent.
The increase in small businesses’ debt is led by owners in their 50s and 60s, the report said.
Opening a fried chicken joint is a common choice for many South Koreans who have been laid off or are trying to get by in retirement. The start-up costs are relatively low and these businesses do not require sophisticated skills, although competition can be fierce.
An analysis by the Seoul Metropolitan Government earlier this year showed that the ratio of businesses shutting down within three years was highest for fried chicken shops, followed by bars and coffee shops.
Small businesses in Seoul closed or shifted categories after an average of only 2.1 years, data showed.
According to data by the South Korean Small and Medium Business Administration, of those who started their own small businesses in 2008, only 60 percent managed to survive past the first year and only 29 percent were still running businesses after five years.
Loans to small businesses are offered at higher interest rates than those to households, and have been profitable for banks, which partly explains the fast increase, said Shin Hyun-yeol, head of the central bank’s financial stability analysis team.
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