Virus Batters Family Businesses in Entrepreneur-Heavy Korea

(Bloomberg) -- Seoul-based labor lawyer Lee Seung-yeon’s phone has been ringing almost nonstop since the coronavirus hit South Korea.

One of the calls is from an owner of a restaurant in tourist spot Myeongdong. The restaurateur is thinking of closing his business after revenue dwindled to 200,000 won ($168) a day. Others phone about trouble paying salaries or about getting government assistance.

“The situation is really serious,” says Lee. “I’ve never experienced anything like this before.”

The coronavirus outbreak has battered economies across the globe, dealing a blow to everything from tourism to consumer spending to factory output. In South Korea’s case, the epidemic is hitting an economy already weakened by trade spats in the region. Korea’s labor market also has one of the world’s highest proportions of self-employed people, whose heavy debt burdens make them more vulnerable to downturns, and their woes could in turn worsen the nation’s slump.

South Korea’s government is pushing for a 11.7 trillion won budget to help cushion the economy from the impact of the coronavirus, while the central bank has raised the ceiling for cheap loans to small and medium businesses.

Signs of economic damage from the virus can be seen everywhere. Confidence is plunging among Korean consumers and manufacturers, and inflation is weakening. The Finance Ministry on Wednesday warned that the labor market will likely feel the full impact of the virus beginning this month, raising concerns that job cuts will squeeze consumer spending.

See also: Korea jobs report shows hiring slowing even before virus spread

Mom and pop businesses proliferate in Korea, many started by baby boomers to supplement their retirement income. That’s helped push up the ratio of self-employed people to about 25% of the job market, one of the highest among Organization for Economic Co-operation and Development countries.

“Most self-employed people got loans to start their businesses, so cash flow really matters for them,” said Jean Lim, a research fellow in Seoul at Korea Institute of Finance’s household debt research center. “If they’re not able to earn enough cash to pay interest, they might face insolvency risks right away.”

Total loans to self-employed people have climbed 22% since 2017 to a record 670.6 trillion won in September 2019, according to the Bank of Korea. Borrowings by low-income earners make up 7.7% of that figure, and about 12% of their loans are high-interest ones from non-bank financial companies.

Loan Risks

Korea’s central bank warned that the soundness of loans to low-income earners may worsen quickly in the case of a slump in the industries they work for, given their ability to meet interest payments has weakened.

The nation’s Financial Services Commission has provided 4.6 trillion won so far in financial support to businesses in trouble due to the virus outbreak, it said in a statement Thursday. The regulator has received some 150,000 inquiries related to funding difficulties after the epidemic erupted. The biggest portion came from the restaurant sector.

See also: Virus Means Worst May Not Be Over for Korean Inc. Downgrades

The labor lawyer Lee, who heads a legal firm called Gah-eul in Seoul, said she’s asked for advice not only from restaurant owners, but also from operators of establishments such as hotels, wedding venues, retailers and clinics.

“Regardless of what kind of business they’re doing, they’re all struggling,” Lee said.

--With assistance from Sam Kim.

To contact the reporter on this story: Kyungji Cho in Seoul at kcho54@bloomberg.net

To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Ken McCallum, Paul Jackson

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