By Yoon Ja-young
The cost to restructure debt laden shipping and shipbuilding industries here will be as much as 31 trillion won ($27 billion), according to the International Monetary Fund (IMF).
In a report, "Benefits and Costs of Corporate Debt Restructuring: An Estimation for Korea," the IMF said it will take about 10 years to recoup the costs, with the restructured industries contributing to economic growth by restarting investment and hiring new employees.
"After years of rapid growth, many Korean export-oriented industries face headwinds from a global economic slowdown. Shipping and shipbuilding are especially affected," the IMF said. "Steel and petrochemicals may become distressed if the global slowdown deepens. The technology intensive industries, such as automobiles and electronics, are exposed to intensifying international competition."
It said corporate debt vulnerabilities were high, and the government was taking steps to "agree, and then swiftly implement, plans for the operational and financial restructuring of vulnerable firms."
Korea is an instructive case to study benefits and costs of corporate debt restructuring, it noted.
It assessed the benefits and costs of debt restructuring of firms that had an interest coverage ratio (ICR) below 1 for three consecutive years.
"With the slowdown of global trade, the growth rate of Korean corporate earnings, particularly in export-oriented manufacturing and shipping, has been declining and has recently turned the estimated cost of corporate restructuring in the shipping and shipbuilding industries negative. Our method gives that cost at about 31 trillion won in the adjusted baseline," the IMF said.
This compares with the 12 trillion won support package for the state-owned Korea Development Bank (KDB) and Export-Import Bank of Korea (KEXIM) and about 10 trillion won in internal loss-absorption capacity available in those banks.
The report points out that moving a firm from an ICR below 1 to above it through restructuring will increase its investment and its hiring of employees annually.
It said the cost will be compensated for by an increase in future GDP growth thanks to higher corporate investment and rises in employment in the subsequent years.
"The key qualitative result is that corporate debt restructurings pay off in the medium term: their economic cost is recouped over about 10 years," the report said.
However, the South Korean government has already injected nearly 40 trillion won into the shipbuilding and shipping companies in the past.
According to Financial Supervisory Service data submitted to Rep. Chae Yi-bai of the minor opposition People's Party, their main creditor banks have injected 20.8 trillion won into 26 troubled shipbuilding and shipping companies since 2008 for restructuring.
When combined with 17.9 trillion won they had provided previously, they have injected a total 38.7 trillion won so far. However, they have recovered only 11 trillion won of this.
The lawmaker warned that restructuring without a vision for the industry will only worsen the problem.
"Most financial support came from state-run banks during the restructuring of shipbuilding and shipping companies, and misjudgments by policymakers only aggravated the problem," Rep. Chae said.
He said that the government is simply applying patches to the problem.
The cost to restructure debt laden shipping and shipbuilding industries here will be as much as 31 trillion won ($27 billion), according to the International Monetary Fund (IMF).
In a report, "Benefits and Costs of Corporate Debt Restructuring: An Estimation for Korea," the IMF said it will take about 10 years to recoup the costs, with the restructured industries contributing to economic growth by restarting investment and hiring new employees.
"After years of rapid growth, many Korean export-oriented industries face headwinds from a global economic slowdown. Shipping and shipbuilding are especially affected," the IMF said. "Steel and petrochemicals may become distressed if the global slowdown deepens. The technology intensive industries, such as automobiles and electronics, are exposed to intensifying international competition."
It said corporate debt vulnerabilities were high, and the government was taking steps to "agree, and then swiftly implement, plans for the operational and financial restructuring of vulnerable firms."
Korea is an instructive case to study benefits and costs of corporate debt restructuring, it noted.
It assessed the benefits and costs of debt restructuring of firms that had an interest coverage ratio (ICR) below 1 for three consecutive years.
"With the slowdown of global trade, the growth rate of Korean corporate earnings, particularly in export-oriented manufacturing and shipping, has been declining and has recently turned the estimated cost of corporate restructuring in the shipping and shipbuilding industries negative. Our method gives that cost at about 31 trillion won in the adjusted baseline," the IMF said.
This compares with the 12 trillion won support package for the state-owned Korea Development Bank (KDB) and Export-Import Bank of Korea (KEXIM) and about 10 trillion won in internal loss-absorption capacity available in those banks.
The report points out that moving a firm from an ICR below 1 to above it through restructuring will increase its investment and its hiring of employees annually.
It said the cost will be compensated for by an increase in future GDP growth thanks to higher corporate investment and rises in employment in the subsequent years.
"The key qualitative result is that corporate debt restructurings pay off in the medium term: their economic cost is recouped over about 10 years," the report said.
However, the South Korean government has already injected nearly 40 trillion won into the shipbuilding and shipping companies in the past.
According to Financial Supervisory Service data submitted to Rep. Chae Yi-bai of the minor opposition People's Party, their main creditor banks have injected 20.8 trillion won into 26 troubled shipbuilding and shipping companies since 2008 for restructuring.
When combined with 17.9 trillion won they had provided previously, they have injected a total 38.7 trillion won so far. However, they have recovered only 11 trillion won of this.
The lawmaker warned that restructuring without a vision for the industry will only worsen the problem.
"Most financial support came from state-run banks during the restructuring of shipbuilding and shipping companies, and misjudgments by policymakers only aggravated the problem," Rep. Chae said.
He said that the government is simply applying patches to the problem.
