Chain Reaction Feared to Hit Economy

The ailing construction sector is feeling sharper pain from the spreading global financial crisis and an economic slump. On Wednesday, Shinsung Engineering & Construction, South Korea's 41st largest builder in terms of capacity, filed for a court receivership to seek bankruptcy protection. Shinsung's case is the first of its kind affecting one of the nation's top 50 construction companies, and is seen as a harbinger of a chain reaction of bankruptcies among builders that could bring huge losses to banks.

It is regretful that Shinsung, a solid profit-making mid-sized builder until last year, is now teetering on bankruptcy amid a liquidity crisis. Its application for court projection from its creditors sent shockwaves throughout the country as other bigger builders are feared to follow suit. A total of 328 small-sized construction firms have gone under in the first 10 months of the year. The figure indicated that one builder bellied up each day. Now, the specter of bankruptcy is haunting mid-sized firms. Market sources said around 30 firms on the list of 100 major local construction businesses are estimated to be in financial difficulty.

As seen in the case of Shinsung, many construction businesses are in trouble due to a nosedive in orders and a backlog of unsold homes. That is, they are suffering from a credit crunch in the aftermath of the U.S. subprime mortgage crisis and its contagion effects on economies across the globe. However, they have to keep in mind that they are to blame themselves for their current woes. The cause of their problem is attributed to their leveraged overextension. They have recklessly rushed to build more homes by taking advantage of a property boom and real estate speculation over the last several years.

Most construction firms have been engrossed on getting bank loans and issuing bonds to fund their housing projects without taking into account their cash flow and creditworthiness. There are an estimated 250,000 unsold homes throughout the country. The companies have brought calamity upon themselves. However, most of them have turned a deaf ear to recommendations that they should sell off non-core assets and subsidiaries in order to raise badly-need funds.

Instead, financially troubled construction companies are just going cap in hand to the government for money. The Lee Myung-bak administration announced a 9-trillion-won aid package to stabilize the shaky building sector last month. It promised to spend 6.3 trillion won on buying properties from struggling companies ― 4.3 trillion won for land and 2 trillion won for unsold homes. In return for the state bailout program, builders ought to press ahead with drastic restructuring to reduce their debts and improve their cash flow. It goes without saying that such a rescue plan can never succeed without painful self-rescue efforts on the part of the beneficiaries.