[Korea Federation of SMEs]
[Korea Federation of SMEs]

Korea Federation of SMEs survey shows manufacturing outlook down 2.4 points in August

Export, production gains confined to semiconductors, autos; producer prices remain a burden

SME loan delinquency rates rise; bad-loan balances also growing

While a scorching heat wave pushes temperatures above 42 degrees Celsius in parts of South Gyeongsang Province and across the country, a chill has settled over small and medium-sized manufacturers. Macroeconomic indicators such as exports and industrial output have improved, driven largely by semiconductors and automobiles, but the August manufacturing outlook among small and medium-sized enterprises has moved in the opposite direction. With a high exchange rate, rising input costs and higher interest rates all hitting at once, delinquency rates and bad-loan balances on SME lending at domestic banks are also growing.

According to the Korea Federation of SMEs' August 2026 SME Business Conditions Survey, the overall Small Business Health Index for August came in at 80.0, up 1.8 points from 78.2 in July. A reading below 100 means more companies expect conditions to worsen next month than to improve. The overall rebound was driven by the service sector: the non-manufacturing outlook rose 3.7 points to 80.0 from 76.3 in July, while the services sub-index climbed 4.3 points to 81.8 from 77.5.

The manufacturing outlook, by contrast, fell 2.4 points to 80.1 from 82.5, and the export outlook slipped 0.5 points to 87.3 from 87.8. While service-sector optimism lifted the headline index, sentiment among manufacturers — the backbone of production and exports — actually deteriorated. Divergence across sub-sectors was sharp: the outlook for textile products plunged 11.7 points to 66.2 from 77.9, and the medical substances and pharmaceuticals sub-index dropped 8.0 points to 82.1 from 90.1. Outlooks for other transport equipment and fabricated metal products fell 6.7 points and 6.2 points, respectively.

The most commonly cited hardship among small businesses is sluggish sales, flagged by 50.7 percent of respondents in the July management difficulties survey. Rising raw-material prices came second at 41.1 percent, followed by intensifying competition among suppliers at 27.9 percent, higher labor costs at 24.7 percent and increased exchange-rate volatility at 18.4 percent. Among manufacturers in particular, rising raw-material prices topped the list at 60.2 percent.

The Bank of Korea has also noted this year that the won-dollar exchange rate "moved sharply, influenced by external uncertainty, tensions in the Middle East and the expansion of overseas investment." When the exchange rate rises, smaller companies that rely heavily on imported raw materials and lack the capacity to hedge currency risk face a significant increase in production costs.

The actual production costs borne by businesses remain elevated. The Bank of Korea reported that the producer price index for June rose 8.6 percent from a year earlier. The domestic supply price index, which covers raw materials and intermediate goods, climbed 13.2 percent over the same period. With price pressures at the business-to-business level running hotter than consumer price inflation, the risk of deteriorating profitability is growing for small manufacturers that have limited ability to pass costs on to customers.

The strain on small businesses is even more visible in financial data. The Financial Supervisory Service reported that the delinquency rate on domestic banks' SME loans stood at 1.00 percent at the end of May, up 0.10 percentage points from the previous month. The rate for small corporate borrowers was 1.11 percent, while that for individual business owners was 0.84 percent — both far above the 0.27 percent delinquency rate on large-corporate loans. The simple average delinquency rate on SME loans at the five major banks fell to 0.58 percent at the end of June from 0.73 percent at the end of May.

The total stock of bad loans has nonetheless grown. The five major banks' combined balance of substandard-and-below loans at the end of the second quarter reached 7.43 trillion won ($5.18 billion), up about 1 trillion won from a year earlier. The ratio of substandard-and-below loans in corporate lending also rose to 0.51 percent at the end of June from 0.42 percent at the end of last year. While the headline delinquency rate fell due to end-of-quarter loan write-offs, the stock of loans delinquent for more than three months has expanded.

SME loan delinquency rates at individual banks also remain elevated. At the end of June, Woori Bank's SME loan delinquency rate stood at 0.75 percent, NH NongHyup Bank's at 0.71 percent, Hana Bank's at 0.59 percent, Shinhan Bank's at 0.49 percent and KB Kookmin Bank's at 0.37 percent. Woori Bank's SME delinquency rate is the highest since comparable data became available in the first quarter of 2019.

A state-run research institute has also concluded that the recovery in exports and investment has yet to spread across industries. The Korea Development Institute projected that exports will grow this year on the strength of semiconductors and that facilities investment will also improve, but warned that investment outside the semiconductor sector will remain weak. It also forecast that construction investment will be slow to recover due to rising construction costs.

"Even if semiconductor and automobile exports increase, small manufacturers will not feel any improvement unless the pickup in orders spreads to suppliers and traditional industries," an SME industry official said. "If banks tighten lending standards on top of an environment where the exchange rate, raw-material prices and interest costs are all high at the same time, companies with weaker financial resources will be the first to feel the squeeze."


hong@heraldcorp.com