President Yoon Suk Yeol speaks during a convention for small- and medium-sized enterprises at the presidential office in Yongsan, May 23. Courtesy of presidential office

The number of financially struggling small- and medium-sized enterprises (SMEs) is on the rise amid sluggish domestic demand resulting from the prolonged period of high interest rates and inflation.

Worsening business conditions have led to an increasing number of companies failing to meet their contractual obligations, such as delivering goods, resulting in a rise in guarantee insurance payouts.

The Composite Business Sentiment Index (CBSI) for SMEs, disclosed by the Bank of Korea (BOK) in September, plummeted to levels seen during the height of the COVID-19 pandemic in September 2020, while their bankruptcy filings are steadily increasing as well.

According to Rep. Kim Jae-sub of the ruling People Power Party, Tuesday, total insurance payouts made by Seoul Guarantee Insurance (SGI) amounted to 548.4 billion won ($406 million) as of the first half of this year.

Guarantee insurance is intended to cover cases where contractual obligations between businesses, such as the delivery of goods or payment for services, are not fulfilled.

Kim said, if this trend continues, SGI's insurance payouts will exceed 1 trillion won this year and reach an all-time high.

The payouts amounted to 699.8 billion won in 2019, 673.2 billion won in 2022 and 884.8 billion won last year.

Notably, insurance payouts for SMEs totaled 518.5 billion won last year and have already reached 325.6 billion won in just the first half of this year.

“The economic difficulties faced by SMEs and individual business owners are shaking the foundation of our economy,” Kim said.

“The sharp increase in guarantee insurance payouts due to the recession signals that companies are reaching the limits of their financial capacity.”

The mounting challenges faced by SMEs are also evident in other data.

According to data released by the central bank on Sept. 27, the CBSI continued to decline for the third consecutive month in September, driven by concerns about economic slowdowns in major countries.

The overall CBSI fell by 1.3 points from the previous month to 91.2, and in particular, the index for SMEs dropped by 2.6 points to 90.2, the lowest level seen since September 2020, when it stood at 86.7.

When calculating the index, the bank uses the long-term average — from January 2003 to December 2023 — as the benchmark value of 100. A value greater than 100 indicates a more optimistic outlook compared to the long-term average, while a value below 100 signifies a more pessimistic perspective.

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Data from the Office of Court Administration also showed a steady increase in bankruptcy filings by SMEs.

The office said the total number of corporate bankruptcy filings from January to August stood at 1,299, the highest figure in the past decade, and the majority of those companies were SMEs.

“SME and small business owners' difficulties further deepen the economic downturn and negatively impact the local economy,” Rep. Yang Bu-nam of the main opposition Democratic Party of Korea said. “The government should consider bold financial interventions and other policy measures.”