S. Korea Rate Hike Burdens Businesses

A hike in the base rate by the South Korean central bank is expected to increase funding costs of local businesses, a report said Tuesday, amid the recent trend of monetary normalization.

According to the report published by the Korea Institute of Finance, if the Bank of Korea raises the key rate by 1% point, borrowing costs of Korean companies will double, Yonhap reported.

The study is based on quarterly corporate earnings report of listed companies between 2005 and 2017, the report added. As a result, businesses can become more reluctant to raise funds through issuing corporate debts or borrowing money from local lenders due to concerns of increased borrowing costs.

In particular, small and medium enterprises are expected to be hit the hardest by the rate hike compared to larger companies and will have to scale back loans from banks, who tend to lend money to higher-credit big names, said the KIF.

In November last year, the BoK raised the key rate to 1.5% from a record low of 1.25% for the first time in more than six years as part of its plan of monetary accommodation.

Meanwhile, South Korea’s Finance Minister Kim Dong-yeon said Tuesday that the government will redouble efforts to successfully implement a series of measures aimed at smoothing out a rise in minimum wage that takes effect this year.

In July last year, the country decided to increase its minimum wage by 16% to 7,530 won ($6.60) for 2018, marking the biggest jump in about two decades.

Although the minimum wage hike is one of the government’s strategies to boost private consumption and narrow the income gap, small and medium-sized businesses expressed concerns about higher labor costs.

The government has earmarked some three trillion won to help reduce the burden on smaller firms which hire part-time workers.

“The minimum wage hike is aimed at boosting households’ income, which also leads to a virtuous cycle of domestic demand, investment and growth,” Kim said during a visit to an office of the Korea Workers’ Compensation and Welfare Service.

“The government will make efforts to help the scheme take root as soon as possible,” Kim said. The government is determined to further raise the minimum wage in Asia’s fourth-largest economy to at least 10,000 won by 2020 on the belief that it is time to break the economy away from an export-dependent growth path.