Zombies have risen as a prevalent theme across various media platforms, including movies, TV shows, books and art, often serving as metaphors for societal issues and symbolizing the breakdown of social order. Moreover, they spark discussions about economic concepts, such as "zombie companies."
A "zombie company" is a term used to describe a firm that persists in operation despite being unable to meet its debt obligations with its operating profits. These entities lack financial health and survive artificially, sustained by low-interest rates or external injections of capital.
In an increasingly diversifying world, countries adopt varying economic structures and philosophies. However, their overarching goal remains consistent: to foster sustainable growth, enhance societal well-being, and elevate living standards for all citizens, not only those living now but also those to come.
In that process, the most important and indispensable mission for the authorities is to make the most of the resources available to society while minimizing costs. Zombie companies can’t sustain themselves but maintain their existence by consuming society’s resources only for the purpose of their own survival.
Unlike their fictional counterparts, these corporate zombies do not inflict direct harm on other businesses. However, they pose a significant threat to the economy by diverting limited resources away from endeavors aimed at sustainable growth and improving living standards for everyone.
South Korea plunged into near sovereign bankruptcy during the Asian financial crisis in the late 1990s, primarily due to a combination of flawed macroeconomic policies and external shocks. However, the country’s poor oversight of the bloated corporate sector was also widely blamed for the crisis.
In return for a massive International Monetary Fund-led bailout package that saved the country from default, South Korea had to undertake sweeping corporate restructuring measures. Companies deemed financially unviable were allowed to fold, and hundreds of thousands of workers lost jobs.
Government after government has since then pledged to strengthen oversight of the corporate sector on an ongoing basis, but authorities have repeatedly implemented a variety of financial support measures in the name of ‘emergency programs’ whenever external shocks took place.
Almost all of these emergency programs were meant to be withdrawn when the economy regains stability, but policymakers tend to keep extending such measures after taking into consideration various factors, leading to the rising number of zombie companies, according to analysis reports and official statistics.
Recent estimates by the Federation of Korean Industries reveal a concerning trend, with nearly 12 percent of audited non-financial companies experiencing complete capital depletion due to sustained losses. This figure marks a rise from previous years and poses a threat to economic stability.
The FKI warned in the analysis report that the increasing number of distressed firms can significantly threaten the stability of the economy as a whole by amplifying and reproducing risks between the financial and real economies.
Data from the central bank also indicates that the corporate sector’s financial soundness is deteriorating, with the delinquency ratio among corporate borrowers from financial institutions rising for five consecutive quarters to hit 1.72 percent by the July-September period of 2023.
It was far below levels seen during the crisis periods, but it was more than double the 0.69 percent recorded in the April-June period of 2022 right before the successive increase started or 0.78 percent during the final quarter of 2019 before the COVID-19 pandemic began, according to Bank of Korea data.
More alarmingly, the Bank of Korea estimated about 45 percent of all companies have failed to generate sufficient profit to cover the interest on their outstanding debt during the first half of 2023, with the proportion hitting the highest in more than a decade since the central bank’s data compilation began in 2010.
The measure, which represents the proportion of companies with their interest coverage ratio standing below 1 and is usually taken to show how well a firm is financially sustainable, stood at just 30 percent in 2010 and had been on an increasing trend even before the COVID-19 pandemic hit the global economy.
These alarming indicators regarding the health of South Korea Inc. could come at a worse time, as a persistently slowing pace of productivity growth is widely feared to have a disproportionately negative impact on the country’s economy, already hampered by the looming demographic catastrophe.
South Korea’s working-age population has already been shrinking, whereas the childbirth rate and the elderly population growth keep breaking records each year in opposite directions. This means productivity can be sustained only with support from other factors through such efforts as corporate-sector reforms.
Projections from both public and private institutions warn that South Korea’s potential growth rate, which represents the sustainable growth an economy can achieve over the medium term without generating inflation, has fallen rapidly and will continue to head toward zero over the coming decades without significant structural reforms.
The private Hyundai Research Institute predicted in a recent report that the country’s potential growth rate, estimated to have fallen to 3.0 percent for the 2009-2019 period from as high as 9.7 percent in the 1980s, would further fall to 2.2 percent in the 2020-2028 period.
The Bank of Korea, the central bank, has repeatedly called for the need to implement structural reforms of the corporate sector as one of only a few ways to improve the country’s productivity, only to see such voices ending with a lonely cry in the wilderness.
Still, the central bank is hardly free from responsibility for the lack of progress in the corporate restructuring effort, as it has not published any strongly worded policy report on that subject for many years. If any, its comments stopped short of forcing the political community to take action.
With national politics increasingly prioritizing near-term, populist goals over the long-term well-being of future generations, the inevitable outcome is that zombie companies continue to flourish, eroding South Korea Inc.’s overall competitiveness on the global stage.
Yoo Choon-sik
Yoo Choon-sik worked as chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. -- Ed.
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