Materials, parts providers most vulnerable to monetary tightening: BOK chief

South Korea’s materials, parts, and equipment companies are more vulnerable to interest rate hikes than other businesses, according to a report co-authored by Bank of Korea (BOK) Governor Shin Hyun-song and published by the Bank for International Settlements (BIS).

According to the BIS on Thursday, Shin co-authored a report titled “Elasticity of money in production networks, working capital, credit lines and financial conditions” with BIS economist Ryan Niladri Banerjee and BIS analyst Jos? Mar?a Vidal Pastor.

The report was published in May, shortly after Shin took office as BOK governor in April.

It analyzed the impact of tightening financial conditions on corporate activity using financial data from 6,834 nonfinancial companies across 47 countries between 2005 and 2024.

The report found that companies further upstream in supply chains, which supply materials and raw materials, tend to have larger unused credit lines.

An unused credit line refers to the portion of a company’s revolving credit facility that remains undrawn and available for future needs.

Upstream suppliers tend to maintain ample credit lines because they must pay for raw materials and labor upfront, while it takes time to receive payments after finished products are sold.

The problem is that these companies are more severely affected when financial conditions deteriorate.

According to the report, when financial conditions tighten by one standard deviation from the mean, companies in the top 25 percent in terms of unused credit line ratios experience a 10-percentage point greater decline in sales after four quarters than those in the bottom 25 percent.

The report also found that the impact of monetary tightening spreads through supply chains.

An analysis of the adverse effects of tightening on individual companies showed that only one-third of the resulting sales decline stemmed from direct effects within the companies themselves, while the remaining two-thirds was attributable to risks transmitted from other companies connected through supply chains.

The BOK, meanwhile, plans to complement its interest rate policy by restructuring its Bank Intermediated Lending Support Facility, which provides banks with low-interest funds to support lending to small and medium-sized enterprises (SMEs), with a greater focus on regional SMEs.