Chip boom masks Korea's growing zombie firm problem

Korea’s semiconductor boom is producing extraordinary headline growth, but its benefits are not being felt evenly across the economy. While strong chip exports have pushed nominal gross domestic product (GDP) sharply higher, the share of “zombie” companies has climbed to a record, the Bank of Korea (BOK) said Tuesday.

The country’s nominal GDP has accelerated since the second half of 2025, fueled by higher semiconductor prices and strong exports. In the second quarter of this year, it surged 26.4 percent from a year earlier, the fastest increase in 47 years.

Away from the export sector, however, the picture is considerably weaker. As of last December, 19.1 percent of nonfinancial companies were classified as zombie firms, up from 17.1 percent a year earlier and the highest level since the BOK began compiling the data in 2010. Of the 29,468 companies, 5,632 fell into the category.

The term refers to those that have been unable to cover even their interest expenses with operating profits for three consecutive years. Their share increased among both large and small and midsize enterprises.

“The percentage of zombie firms has continued to rise in recent years. Both the proportion of variable-rate borrowing and delinquency rates have seen an increase,” Chang Cheong-soo, a BOK deputy governor, said at a press briefing.

The problem is particularly pronounced in industries dependent on domestic demand. Zombie firms accounted for 43.7 percent of companies in real estate and 28.4 percent in accommodation and food services, compared with a much healthier picture among export-oriented manufacturers benefiting from the chip boom.

That weakness is beginning to matter beyond the companies themselves, as lenders are taking on more exposure to financially fragile borrowers. Credit extended to zombie firms accounted for 21.2 percent of total corporate lending at the end of last year, up from 15.6 percent a year earlier.

And more of that exposure is shifting toward nonbank lenders, such as savings banks and mutual finance institutions. Nonbank institutions accounted for 42.2 percent of zombie firms’ total debt last year, up from 38.2 percent in 2024.

The central bank warned that some industries with less cash on hand than others could continue facing increasing difficulty rolling over their debt, particularly if interest rates rise or funding markets become less accommodating.

“Vulnerabilities could continue to build, notably in industries facing prolonged weakness,” the central bank said in its report. “Lending to vulnerable sectors should be closely monitored and risk management strengthened, as higher market rates could increase companies’ interest burdens and those that rely heavily on market-based funding could face greater refinancing risks.”