High oil prices, exchange rates, and interest rates push SME loan defaults sharply higher in South Korea

South Korean small and medium-sized enterprises (SMEs) are grappling with a significant surge in loan delinquency rates, driven by a confluence of high oil prices, a weak won, and rising interest rates. The average delinquency rate for SMEs stood at 0.73% as of the end of May, marking the highest level recorded since January 2020.

This figure starkly contrasts with the delinquency rates of large corporations, which remained at 0.09% during the same period. The situation for SMEs has worsened considerably from 0.50% at the end of last year, with a notable increase of 0.08 percentage points in May alone. The rate of non-performing loans (loans overdue by three months or more) for SMEs also climbed to 0.68%, more than double that of large corporations and households.

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The delinquency rate is rapidly increasing, particularly for SMEs in sectors like real estate, rental businesses, and services. As domestic and international uncertainties continue, the polarization between businesses based on their size will intensify.

Financial industry officials attribute the escalating delinquencies primarily to SMEs in sectors such as real estate, rental businesses, and services. They predict a deepening polarization between businesses based on their size and resilience as domestic and international uncertainties persist.

The current economic pressures are linked to the ongoing Middle East conflict, which has driven up oil prices, and the depreciation of the Korean won to levels not seen since the foreign exchange crisis. Coupled with rising interest rates, these factors are squeezing businesses, especially those with variable-rate loans, which are more immediately vulnerable to rate hikes.

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A significant portion of loans to self-employed individuals and small business owners are variable-rate loans. They are immediately affected by interest rate hikes, making them more vulnerable in terms of financial health.