Published : Nov. 20, 2016 - 15:37
The South Korean government’s almost nonexistent measures to speed up corporate restructuring in ailing industries under no clear economic leadership has exacerbated the country’s already-weak long-term growth prospects.
In the aftermath of the slowdown in global trade, the government recently announced corporate restructuring measures for the ailing shipbuilding and shipping industries suffering from a decline in orders.
It was part of the government’s “three-track corporate restructuring plan,” announced in April to quickly reorganize about 300 highly-indebted companies in cyclically vulnerable sectors -- shipbuilding, shipping, construction, steelmaking and petrochemicals.
However, the measures on restructuring of shipbuilders and shippers, announced on Oct. 31, have seen little progress, with the exception of the plan to order public vessels for shipbuilders and some additional financial support for shipping companies.
The repetitive measures include reducing the workforce at Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering by 32 percent to 42,000 from 62,000. The number of planned reduction of docks remained the same at 24 from 31 between 2015 and 2018.
Critics also point out that the government unfairly extended a lifeline to ill-fated DSME whose debt-to-asset ratio exceeds 7,000 percent.
DSME’s plan for the additional financial injection of 2.8 trillion won ($2.4 billion) from creditors was also met with protest from the labor union opposing additional job cuts. The union, however, eventually accepted the restructuring plan that includes a no-strike pledge demanded by the creditors after three weeks of heavy fighting last week. The creditors include the Korea Development Bank and the Export-Import Bank of Korea.
In the wake of the 2008 global financial crisis, the government vowed in 2009 to closely monitor 111 indebted companies in shipbuilding, shipping and construction sectors and drive unhealthy businesses out of the market. However, only two companies have closed their business over the past seven years.
According to data by credit rating agency NICE Information Service, 413 out of 1,352 companies were so-called “zombie companies” whose interest coverage ratio has been below 1 for three straight years. The ICR of below 1 means the firm is not making enough earnings to make interest payments. The number of such companies jumped to 413 as of Oct. 12 from 283 at the end of 2010.
The Financial Services Commission, which leads the corporate restructuring measures in ailing sectors, has barely touched the steelmaking or petrochemicals industry this year.
Since the entire nation has been rocked by the influence-peddling scandal involving President Park Geun-hye and her long-time confidante Choi Soon-sil, the government’s economic team has lost leadership in pushing the corporate restructuring. FSC Chairman Yim Jong-yong is in an awkward position after being named by embattled President Park to become the new finance minister earlier this month.
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Sung Tae-yoon, economics professor at Yonsei University, criticized the government for attempting to shift its tasks on corporate restructuring onto the next administration. More than a year is left until a new administration is inaugurated in February in 2018.
“Even before the Choi Soon-sil scandal broke, the government was already delaying corporate restructuring. The problem is that the current situation is too grave to delay it for more than a year,” Sung said.
“If corporate restructuring is delayed, its repercussions will negatively affect other industries and other companies,” he said.
His comments resonate with a recent report by the Hyundai Economic Research. The economic think tank said the spread of a crisis in one industry with an increase of firms at the brink of bankruptcy will affect other industries in 2017.
If the demand in the five vulnerable sectors contracts by 10 percent, the volume of added value in the five sectors will decline by 9.9 trillion won and an additional 9.7 trillion won reduction in other industries, indirectly hit by the slump, the institute said.
“It is highly likely that the current trend of an increasing number of firms at risk will continue through 2017,” it said.
The government’s leniency on risky firms is also criticized by international experts.
At a recent forum in Seoul, World Economic Forum’s Asia Pacific head Justin Wood warned that the Korean government’s excessive financial support for companies prevent Korea from moving forward.
“The government here is keen to make sure SMEs thrive but their over generous financial support distorts the market. The government needs to let more companies fail,” Wood said.
Delayed restructuring takes a toll on Korea’s growth in the long term, while the nation’s growth potential is going downward amid an aging population and low birth rates.
According to the Bank of Korea, Korea’s growth potential has continued to fall from 4.8-5.2 percent in 2001-2005 to 3-3.2 percent in 2015-2018. BOK officials have reportedly began working to re-estimate the figure amid lowered labor productivity.
Credit rating agency Moody’s said in a report that corporate restructuring will bring more benefits than harm in the long term.
“In the near term, the restructuring process is likely to impinge upon real gross domestic profit growth, employment and government finances. But we take the view that Korea’s sovereign credit profile has room to absorb any immediate negative impact,” Moody’s said.
“Empirical studies by the International Monetary Fund suggest that over the longer term, the economic costs associated with corporate debt restructuring tend to be outweighed by the benefits such as annual increases in investment and employment,” it said.
By Kim Yoon-mi (yoonmi@heraldcorp.com)