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S Korea central bank warns of small businesses' increasing debt risks - report

SEOUL : South Korea's central bank has warned debt repayment risks would sharply increase for small business owners next year, according to a biannual financial stability report released on Wednesday.

The Bank of Korea (BOK) estimated in the report that small business owners' debt-service ratio (DSR), or the ratio of interest and principal payments to disposable income, would rise to 46.0 per cent in 2023, after falling to 38.5 per cent in 2022 from 40.0 per cent 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 expiration of emergency lending programmes this year, the BOK said.

However, the bank also sees "a possibility of sharp increase in repayment risks next year, especially among the low-income class."

By income class, the BOK estimated the DSR to jump from 34.5 per cent in 2022 to 48.1 per cent in 2023 for the bottom 30 per cent of earners, from 38.6 per cent to 47.8 per cent for the middle, and from 39.5 per cent to 44.4 per cent for the top 30 per cent.

The government's special lending programme that extends debt maturities and defers repayments for small businesses and the self-employed hit by the pandemic expires this September.

South Korea has scrapped since late April all COVID-19-related restrictions, except a mandate to wear masks indoors.

The government last month prepared a total 62 trillion won ($47.94 billion) supplementary budget to reimburse small businesses' losses due to the curbs.

Financial support programmes should be shifted from "liquidity support" to "solvency support", such as measures to help restructure debts or close businesses, the BOK added in the report.

The central bank on Tuesday said it expects inflation to be higher than the earlier projection and that it would closely assess debt repayment burdens to determine whether a half-percentage point interest rate hike in July was appropriate.

The BOK last month raised interest rates by 25 basis points to 1.75 per cent, 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)

Source: Reuters

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