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| Financial Services Commission Chairman Eun Sung-soo, second from left, speaks during a meeting with officials from the small- to mid-sized enterprise industry in Seoul, Monday. Yonhap |
Financial authorities urged to preemtively weed out nonviable firms
By Lee Min-hyung
Economic organizations here and abroad have urged Korean financial authorities to seek ways to preventively weed out nonviable, money-losing "zombie companies" as continuing support for them could result in unwanted outcomes for financial firms.
They warn that the Korean government may pay an unwanted price for keeping afloat such firms and ineffective capital distribution will end up hurting the nation's overall industrial competitiveness.
According to a recent report by the ASEAN+3 Macroeconomic Research Office (AMRO), authorities here should enhance monitoring on financial institutions to check whether their financial assistance to zombie firms does not pose any threat to their soundness after the pandemic.
"Given the weakening financial status of zombie firms, there stands a chance for financial institutions' soundness to deteriorate as well," the AMRO report said. AMRO is Asia's regional macroeconomic surveillance unit. It is the Asian equivalent to the International Monetary Fund (IMF).
Another report recently released by the Bank of Korea (BOK) also raised the need for uncompetitive and financially insolvent companies to shut down their businesses.
"With a transparent and swift restructuring measure, uncompetitive companies should be expelled," the report said.
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The year-long debate centers on when to finish the government's seemingly "unconditional" financial support for small- and medium-sized enterprises (SME) and the self-employed suffering from the fallout of the coronavirus.
The BOK and financial authorities have offered special financial aid packages for zombie companies in March 2020 after the pandemic shock started engulfing the nation.
But data showed the time has come for authorities to stop giving false hope to the companies and guide them to undergo self-restructuring.
According to a recent report by the central bank, more than 40 percent of the nation's 2,175 listed and non-listed companies were incapable of covering interest payments with their operating profits last year. Of the companies surveyed, those whose interest coverage ratios fell below 1 reached 40.7 percent as of the end of 2020, up by 4.6 percentage points from the previous year.
The ratio is calculated by dividing a firm's operating profit by interest expenses during a certain period of time. When the figure for a company hovers below 1, it is on the verge of collapse. Of concern is that the portion of zombie firms has been on the gradual rise over the past few years. According to another report from the central bank, the portion of companies whose interest coverage ratio was below 1 reached 30.9 percent in 2016, but it increased to 35.7 percent as of 2018.
The recent rise of zombie firms is attributable to the pandemic-induced economic doldrums throughout last year. But they were able to evade collapse with a series of assistance programs from the government and the central bank. Under the government's lifeline measures, many companies teetering on the verge of collapse could postpone their loan interest and principal payments until the end of September.
The Financial Services Commission has been running a program since April 2020 that allows SMEs and the self-employed to pay back their interest and principal worth 130 trillion won ($114.5 billion).
"The government is advised to pick and choose some companies that have potential for a rebound and offer assistant packages only for such firms after careful review of their financial soundness," a financial industry source said. "The unilateral lifeline support for a number of zombie firms raises concerns over ineffective capital distribution."
Kim Dae-jong, a professor of business administration at Sejong University, said the future of zombie firms should be determined in tandem with the market logic, not by financial support from state-run organizations such as Korea Development Bank.
"Any firms with low competitiveness should merge with other firms or close down in the market economy," the professor said. "No companies can survive if they are satisfied with the status quo by receiving financial assistance from the government."
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