The ticking time bomb of debt among Korea’s small business owners

Posted on : 2022-04-17 09:02 KST Modified on : 2022-04-17 09:02 KST
“For Lease” signs are on every corner in what used to be Seoul’s most jam-packed commercial districts
A sign on a storefront in Myeongdong reads “For Lease” in large letters in this undated file photo. (Yonhap News)
A sign on a storefront in Myeongdong reads “For Lease” in large letters in this undated file photo. (Yonhap News)

With the continuing COVID-19 pandemic, the vacancy rate in Myeongdong has reportedly surpassed 50%. Vacant stores were nowhere to be found in the area in 2019, but due to social distancing measures that led to poor sales, many store owners were unable to afford what it takes to run a business in one of the most well-known commercial districts in the entire country of South Korea: steep rent.

The sight of “For Lease” signs dotting the streets of Myeongdong, which once overflowed with people, fills onlookers with a sense of deep eeriness. The vacancy rates of Gwanghwamun (23.0%), Namdaemun (14.5%), Jongno (10.8%) and such medium-to-large commercial areas in Seoul’s city center as a whole, which came down to 17.5% as of the end of the year last year, are not too different.

The South Korean government has adopted several aid packages for small business owners. Starting in April 2020, it extended debt maturity and delayed repayment three times, at an interval of six months each time. Then in March 2022, the government provided another extension during the Omicron wave of the coronavirus. By the end of 2021, the balance of small business loans that were covered by the government’s maturity extension and repayment deferment measures amounted to more than 130 trillion won (US$105 billion).

Since the fourth quarter of 2021, 3.2 million small business owners have received 16 trillion won worth of pandemic aid (including 1 million won in the first round and 3 million won in the second round) with the aim of easing the burden of rent and wages for employees and helping them maintain their livelihood. Those owners have also received assistance for purchasing thermometers and other types of disease control equipment.

In addition, the government has provided around 2.2 trillion won in subsidies to compensate the losses of around 900,000 small businesses whose sales decreased as a result of the business closures, early closing hours, and caps on private gatherings that were part of the government’s social distancing restrictions in the fourth quarter of 2021.

Debt extensions and repayment deferments

There have been growing fears that small business owners would start going under as their sales stalled and debt ballooned during the pandemic.

According to a financial stability report released by the Bank of Korea in December 2021, small business debt at the end of September 2021 amounted to 890 trillion won for 2.57 million individuals, or an estimated 350 million won (US$283,000) per business owner.

Small business debt in the fourth quarter of 2021 was up by 14.2% year over year, which was even faster than the rate of increase for household debt (10.0%). The business sectors in which debt increased the fastest were wholesale/retail (12.7%) and leisure/service (20.1%).

At the same time, sales for small business owners have remained sluggish, especially for restaurants, accommodations, and other parts of the in-person service sector. In October 2021, sales in the restaurants/accommodations sector were at 89.8% of their level at the end of 2021, while sales in the leisure/service sector were just 72.8% of their previous level.

Since the basic interest rate has risen 0.75 points since August 2021 — from 0.5% to 1.25% — the interest that debtors must cover has also increased considerably.

While small business owners are still holding on thanks to the government’s measures to delay debt maturity and defer interest payments, there are fears that rapidly expanding loan principals and the growing burden of interest following rate hikes will drive vulnerable and high-risk small business owners to default.

At the same time, the number of small business owners has shrunk by around 350,000 during the pandemic, from 6.68 million (including unpaid family employees) at the end of 2019 to 6.33 million in January 2022. Significantly, that shrinkage included 190,000 small business owners with employees, a category that decreased from 1.54 million to 1.35 million.

Examining broad trends among small business owners, Koreans who moved to the cities during the period of economic growth in the 1970s and 1980s generally worked as wage earners or as small business owners in the retail/wholesale or restaurants/accommodations sectors. The number of wage earners rose above 7 million in 1983 and then above 20 million in 2018, steadily increasing in every year except 1998, when Korea went through the Asian financial crisis.

The number of small business owners (including unpaid family employees) also rose above 5 million in 1988, the year that the Seoul Olympics were held, and then above 8 million in 2002, after many wage earners were forced into self-employment during the restructuring process that took place in 1998.

But that number has been declining in recent years for various reasons, including the slump in domestic demand following a credit card crisis in 2003-2004, the proliferation of large discount supermarkets, the expansion of franchises, and the development of technology. That decline has been particularly pronounced in the wholesale/retail, restaurants/accommodations and leisure/service sectors because of social distancing and other restrictions that have been put into place during the COVID-19 pandemic.

Measures should be taken for a soft landing

Many of the small business owners who entered the sector during the early period of economic growth or in the wake of the Asian financial crisis are getting older.

Figures for the number of small business owners (excluding the agriculture, forestry and fishing industries) between 2009 and 2021 show that the number of owners aged 15-39 has fallen from 1.3 million to 0.96 million and the number in their 40s has decreased from 2 million to 1.3 million, while the number aged 60 and above has increased from 0.7 million to 1.35 million.

As a share of the total, business owners aged 60 and above have been on the rise, from 12.6% in 2009 to 26.1% in 2021, an increase of 13.5 points. But the share of people in their 40s and below has decreased by 15.8 points over the same period, from 59.4% to 43.6%.

It’s expected that baby boomers and other older small business owners will soon be pushed out of the labor market.

Even before the pandemic, the fact that the self-employed share of the labor market is much higher in Korea than in other major countries had caused considerable concern.

As of 2020, small business owners accounted for 24.4% of all workers in Korea, which was much higher than in Japan (10.0%), France (12.4%), Germany (9.2%) or the US (6.3%). The self-employment rate was higher in Greece (31.9%), Turkey (30.2%), and Mexico (30.4%), but those three countries are all major tourist destinations.

In the future, Korea’s self-employment rate is likely to decrease to the level of major developed economies for a variety of factors.

In the short term, the government needs to take measures to help vulnerable and at-risk small business owners that may find themselves unable to repay their debts because of rising interest rates and sluggish sales amid the pandemic. In the long term, the government needs to arrange a soft landing for aging small business owners while creating a social safety net to help them maintain a stable livelihood.

By Kim Yong, finance expert

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