SEOUL • Swelling debt at the 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 per cent in the past 12 months, to an all-time high of 256 trillion won (S$315 billion), according to the Bank of Korea. That makes it more than one-third the size of household loans, which themselves may also contain some hidden borrowing for small enterprises, according to the central bank.
What most worries policymakers in South Korea is that only 30 per cent of small businesses last more than five years, and many of those 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.
Lawmakers from both the major parties have recently warned of rising default risks of mom-and-pop ventures due to high competition and the slowing economic growth rates.
Seoul's Hongik University economics professor Jun Sung In said: "Many of those who start small businesses in Korea are middle-aged workers who have left their companies, either voluntarily or unwillingly, and are unprepared.
"A lot of them fail in a year or two. They suffer more than those employed at companies during an economic slowdown."
Economists forecast that South Korea's economy will grow 2.6 per cent this year and 2.7 per cent next year, lower than projected by the central bank and the government. This rate of expansion, while better than most developed economies, compares unfavourably with average annual growth of 3.6 per cent in the last 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. According to Ms Jean Lim, a research fellow for Korea Institute of Finance, this downward trend may change as the self-employed see their income and profitability deteriorate.
Data from the statistics office showed that the number of self-employed rose by 86,000 last month, a second monthly gain after years of steady decline.
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.
For many who have been laid off or are trying to get by in retirement, opening a fried chicken joint is the most common thing to do. The start-up costs are relatively low and the business does not require sophisticated skills, though competition can be fierce.
An analysis by the Seoul Metropolitan Government earlier this year showed 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 changed categories, after an average of only 2.1 years, data showed.
According to the Small and Medium Business Administration, of those who started their own small businesses in 2008, only 60 per cent managed to survive past the first year, and only 29 per cent were still operating 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 Bank of Korea's head of financial stability analysis team Shin Hyun Yeol.