Warnings have been repeatedly raised on the danger mounting household and government debts are posing to the country’s sluggish economy.
Corporate debt problems have been considered less severe. A recent report from a local research institute, however, showed that this perception was far from reality.
Korean companies’ debt-servicing capacity was near the bottom among those in the 41 nations surveyed in the report released by the LG Economic Research Institute earlier this month. Their cash flow coverage ratio -- an indicator of the ability of a company to pay interest and principal amounts when they come due -- stood at 0.5 in 2014, far below the overall average of 1.3. In other words, Korean firms on average could be counted on to pay only half of the interest and principal due with cash or cash equivalents.
In recent years, local companies have increased borrowing at a rapid pace on the back of low interest rates in contrast to the trend of deleveraging private-sector debt in other advanced economies in the aftermath of the 2008 global financial crisis.
The report showed that Korea’s corporate debt -- including bond issuance, bank loans and financing from the government -- amounted to 1.631 quadrillion won ($1.364 trillion) in the third quarter of last year, up 6.7 percent form a year earlier. Its nominal gross domestic product rose by 4.2 percent over the cited period.
The country’s corporate debt-to-GDP ratio reached 105.3 percent in the second half of 2015, marking a 3.1 percent increase from a year earlier, which was far above the global average of 1.5 percent over the same period.
What is particularly worrying is the high proportion of short-term borrowing in debts owed by listed Korean companies. According to the LGERI report, short-term debts accounted for 42.6 percent of their total borrowing in 2014, the fifth-highest among the 41 states surveyed. The four countries that ranked higher than Korea were Pakistan, Taiwan, Vietnam and China.
The low cash flow coverage ratio for Korean firms may be attributed mainly to the high proportion of short-term borrowing in their debts.
Lee Han-deuk, a senior analyst at the research institute, indicated that the debt structures of Korean companies have left them more vulnerable than their peers in other developed nations to pressures from performance deterioration amid a global economic downturn.
Local businesses have been suffering from plummeting profitability as they face mounting challenges from competitors in China and other emerging countries and have difficulties finding new sources of growth.
As a result, Korea has seen its corporate credit health deteriorate sharply, despite its sovereign credit rating continuing to be raised to its highest level ever. In 2010, the number of Korean companies whose credit rating was upgraded was nearly four times as many as the corporations that saw their credit rating downgraded. But the comparable figure was reduced to 0.55 times last year.
Economists expressed growing concern that the corporate debt problem may become a catalyst for another financial crisis. They note that corporate debts could turn out to be a weaker link than household and government debts in the country’s financial system if its economy is hit by a complex set of external impacts.
“In Korea, financially distressed companies are usually saddled with a large amount of debt, so there is a high likelihood that their problems will result in disrupting the country’s financial markets and economy,” said Lee.
These conditions further raise the need to accelerate the work to overhaul faltering companies in order to lessen or preempt possible risks to the financial system, economists say.
Given the world economic conditions, it may hardly be expected that local enterprises will enhance their debt-servicing capacity by improving their business performance in the short run. Lee said it was important to undertake financial restructuring of failing firms in a more square and urgent manner to ease concerns over corporate debts.
By Kim Kyung-ho (khkim@heraldcorp.com)
