BOK data shows 3 out of 10 Korean firms failed to cover their debts in Q2
Three out of every 10 Korean firms listed on the stock market failed to service their debt in the second quarter of this year, Bank of Korea data showed Monday.
A total of 30.2 percent out of 1,491 firms said their average interest coverage ratio stay below 100 percent in the April-June period, up from 26.1 percent recorded in the previous year.
The interest coverage ratio measures a firm’s capacity to cover financial costs with operating profit and a reading below 100 percent signals that a company in question cannot repay a large part of the interest with operating profit.
The central bank’s data highlights tougher business conditions for Korean firms amid growing uncertainties about the global economy plagued by European debt woes and slowing exports.
The worsening situation warrants steps to restructure such cash-strapped companies. Financial firms in Korea are also required to strengthen their risk management and accelerate monitoring of their corporate clients and lending practices in the face of greater uncertainty.
Korea’s economy grew 0.9 percent in the second quarter from three months earlier, down from 1.3 percent expansion in the first quarter. With the growth rate tapering off, the country’s consumer prices jumped to a three-year high of 5.3 percent in August, putting the central bank’s policymakers in a dilemma over a plan to normalize interest rates.
Analysts said a hostile business environment tended to hit smaller firms first while large conglomerates are relatively quick to prepare for a downturn in the economy with their bigger cash reserves.
A troubling trend in the financial sector is that authorities are asking not only major banks but also second-tier lenders to tighten standards in extending loans, a development that could further undercut those small firms.
The dizzy fluctuation of the Korean won against the dollar is also a big challenge for Korean companies, many of which depend on the export market to bolster their revenues. The Korean won has been under pressure in recent weeks as foreign investors abandon it for safe haven currencies like the U.S. dollar amid worries that the U.S. and the eurozone might slip into recession.
