High Exchange Rate and Minimum Wage Hikes... SMEs Say "It's Becoming Impossible to Hold On"

Raw Material and Logistics Costs Surge Together
Profitability Deteriorates, Liquidity Crisis Deepens
Non-Performing Loans Widen, Limits Reached

With the won-dollar exchange rate hovering around 1,500 won for an extended period, management burdens on small and medium-sized enterprises (SMEs) have reached their limit. Raw material prices, logistics costs, and financial expenses are all surging simultaneously. On top of this, weak domestic demand and an economic downturn are compounding the situation, prompting SMEs to report shrinking profitability and liquidity crises. Furthermore, with the possibility of a minimum wage hike next year, more voices in the field are saying, "We can no longer hold out."

According to the Bank of Korea's Economic Statistics System on July 3, the average won-dollar exchange rate (based on closing prices) for the first half of this year was 1,484.6 won. This is the highest level since the first quarter of 1998 (1,493.1 won) during the foreign exchange crisis. In particular, the average exchange rate for the second quarter was 1,501.6 won, surpassing the 1,500 won mark. This is the first time since the first quarter of 1998 (1,596.8 won) that the quarterly average exchange rate has exceeded 1,500 won. The prolonged high exchange rate that the SME sector has been concerned about since the end of last year has become a reality. In fact, in a survey conducted by the Korea Federation of SMEs last December with 635 SMEs, it was forecast that an exchange rate in the 1,400-won range would become the "new normal." However, in just seven months, the market is now facing an exchange rate in the 1,500-won range.

The shock from the high exchange rate is hitting SMEs that import raw materials for production much harder than export-focused large corporations. When the exchange rate rises, the import price of raw and subsidiary materials increases, raising production costs immediately, but it is often difficult to raise supply prices accordingly. In addition, rising transportation and financial costs are quickly eroding operating profits. SMEs also have weak foreign exchange risk management capabilities. In the same survey, 87.9% of SMEs said they do not use foreign exchange risk management tools such as forward exchange contracts or hedging products. This reflects the reality that, as transaction volumes are not large and they lack specialized personnel and financial knowledge, SMEs find it difficult to manage foreign exchange risk on their own. The appropriate exchange rate presented by the surveyed companies averaged 1,362.6 won, indicating that the current exchange rate is far beyond what most companies can bear.

The burden of the high exchange rate is directly leading to a deterioration in SMEs' financial soundness. According to the Bank of Korea, as of the end of March this year, SMEs accounted for 58.9% of non-performing loan borrowers. This is almost twice as high as the 32.2% recorded at the end of March 2016, when the size of non-performing loans was at its peak. In contrast, the proportion for large corporations decreased from 60.4% to 20.5% over the same period. The number of SMEs that were more than one month delinquent on their loans also increased about 2.6 times, from 22,339 at the end of March 2016 to 58,372 at the end of March this year. The business climate is also showing little sign of improvement. The Business Survey Index (BSI) for manufacturing in the third quarter of this year, compiled by the Korea Chamber of Commerce and Industry, was 80, well below the standard of 100. While large and mid-sized companies saw some improvement, SMEs remained at 78, the same as the previous quarter. The Small Business Health Index (SBHI) for July, compiled by the Korea Federation of SMEs, also fell 1.4 points from the previous month to 78.2. Manufacturing rose slightly to 82.5, but non-manufacturing dropped 2.1 points to 76.3.

In this situation, ongoing discussions about an increase in next year's minimum wage are adding to the burden for SMEs and small business owners. The Minimum Wage Commission held discussions up to the third revised proposal the previous day, but labor representatives proposed an hourly wage of 11,800 won, while management proposed 10,390 won, leaving a gap of 1,410 won unresolved. Management representatives argue that, given the high exchange rate and depressed domestic demand, business conditions have already reached their limit and it is difficult to bear any additional labor costs. Ryu Kijeong, Executive Vice President of the Korea Employers Federation, said, "The reality for SMEs and small business owners is very serious, even if it is masked by the semiconductor boom," and added, "If the labor side's revised proposal becomes a reality, the actual labor cost burden will increase significantly, making it difficult for the field to bear." Yang Okseok, Head of Workforce Policy at the Korea Federation of SMEs, also said, "Voices in the field are so desperate that some are even calling for a cut in the minimum wage. There are workers asking for no further increases in the minimum wage, and please also consider those who fear losing their jobs."

This content was produced with the assistance of AI translation services.