By Choi Sung-jin
Korean businesses' debt ratio against gross domestic product is the highest of major emerging economies, a report says. It was 150 percent of GDP at the end of 2014, twice the average 75 percent of emerging countries.
The National Assembly Budget Office released the report, "Checking risk factors of Korean economy in 2016," Wednesday. It is based on the U.S. Treasury Department's 2015 report on financial stability, which surveyed Korea, China, Chile, Thailand, Turkey, India, Brazil, South African Republic, Russia, Mexico and Indonesia.
Korea's corporate debt ratio was even higher than the 140 percent of China, which is sometimes suspected of manipulating corporate debt and toxic assets.
Chile (120 percent), Thailand (110 percent) and Turkey (80 percent) also had above-average corporate debt ratios while India (75 percent), Brazil (70 percent), South Africa (65 percent) and Russia (55 percent) showed relatively lower ratios. Mexico (40 percent) and Indonesia (35 percent) were the lowest.
The office expressed concern about Korean businesses' high debt ratios and undue reliance on loans.
"The domestic companies have managed to handle their interest burdens and default risks thanks to low interest rates so far, but future hikes in interest rates will increase such burdens and risks," the report said. "Corporate loans are far larger in scale than household debts on average and are likely to work as additional risks to the national economy, especially if the current slump prolongs."
According to the Bank of Korea, total liability of Korean businesses was 2,347 trillion won ($1.895 trillion) as of March 31, 2015, up 103 trillion won from a year before. Korean banks' lending to businesses also increased to 1,042.7 trillion won, a rise of 62 trillion won from the end of 2014. Corporate lending has rapidly increased since 2013, riding on low interest rates.
Economic experts here and abroad have warned against snowballing household debt as the time bomb threatening to trigger financial turmoil. But families usually have assets in excess of their debt and are less likely to cause a financial crisis than feared, they said. Corporate debt, on the other hand, is far larger in scale and, given the nation's economy is contracting much more rapidly than expected, could emerge as a bigger risk than household debt.
Increasing corporate debt leads to worsening financial health. The share of companies with a debt ratio of 200 percent or higher rose from 12.3 percent at the end of 2014 to 12.9 percent at June 30 last year.
Corporate solvency has been on a steady decline, too. The ratio of businesses with interest coverage rate of lower than 100 percent, which refer to firms that cannot pay interest with operating income, rose to 35.3 percent in the first half of 2015, from 33.5 percent a year ago. Small and medium enterprises, in particular, saw the ratio jump from 42 percent to 44.6 percent over the period.
"These indicate the failure to restructure marginal businesses has resulted in the mass appearance of ‘zombie firms' that subsist on low interest rates," a central banker said, requesting anonymity. "If interest rates go up, a chain insolvency of these zombie companies and their numerous suppliers will follow, shaking the financial sector, dragging down sovereign rating and hurting the national economy."
Korean companies' ability to pay interest through business activities, as measured by operating surplus divided by interest payment, was also weaker than major countries, at 4.3 times, compared with Japanese businesses' 14.3 times, German companies' 10.2 times and British enterprises' six times.
"Businesses in these advanced countries have enhanced their interest-paying ability through debt restructuring in the wake of the global financial crisis, but Korean companies have failed to do so," another BOK official said.
Korean businesses' debt ratio against gross domestic product is the highest of major emerging economies, a report says. It was 150 percent of GDP at the end of 2014, twice the average 75 percent of emerging countries.
The National Assembly Budget Office released the report, "Checking risk factors of Korean economy in 2016," Wednesday. It is based on the U.S. Treasury Department's 2015 report on financial stability, which surveyed Korea, China, Chile, Thailand, Turkey, India, Brazil, South African Republic, Russia, Mexico and Indonesia.
Korea's corporate debt ratio was even higher than the 140 percent of China, which is sometimes suspected of manipulating corporate debt and toxic assets.
Chile (120 percent), Thailand (110 percent) and Turkey (80 percent) also had above-average corporate debt ratios while India (75 percent), Brazil (70 percent), South Africa (65 percent) and Russia (55 percent) showed relatively lower ratios. Mexico (40 percent) and Indonesia (35 percent) were the lowest.
The office expressed concern about Korean businesses' high debt ratios and undue reliance on loans.
"The domestic companies have managed to handle their interest burdens and default risks thanks to low interest rates so far, but future hikes in interest rates will increase such burdens and risks," the report said. "Corporate loans are far larger in scale than household debts on average and are likely to work as additional risks to the national economy, especially if the current slump prolongs."
According to the Bank of Korea, total liability of Korean businesses was 2,347 trillion won ($1.895 trillion) as of March 31, 2015, up 103 trillion won from a year before. Korean banks' lending to businesses also increased to 1,042.7 trillion won, a rise of 62 trillion won from the end of 2014. Corporate lending has rapidly increased since 2013, riding on low interest rates.
Economic experts here and abroad have warned against snowballing household debt as the time bomb threatening to trigger financial turmoil. But families usually have assets in excess of their debt and are less likely to cause a financial crisis than feared, they said. Corporate debt, on the other hand, is far larger in scale and, given the nation's economy is contracting much more rapidly than expected, could emerge as a bigger risk than household debt.
Increasing corporate debt leads to worsening financial health. The share of companies with a debt ratio of 200 percent or higher rose from 12.3 percent at the end of 2014 to 12.9 percent at June 30 last year.
Corporate solvency has been on a steady decline, too. The ratio of businesses with interest coverage rate of lower than 100 percent, which refer to firms that cannot pay interest with operating income, rose to 35.3 percent in the first half of 2015, from 33.5 percent a year ago. Small and medium enterprises, in particular, saw the ratio jump from 42 percent to 44.6 percent over the period.
"These indicate the failure to restructure marginal businesses has resulted in the mass appearance of ‘zombie firms' that subsist on low interest rates," a central banker said, requesting anonymity. "If interest rates go up, a chain insolvency of these zombie companies and their numerous suppliers will follow, shaking the financial sector, dragging down sovereign rating and hurting the national economy."
Korean companies' ability to pay interest through business activities, as measured by operating surplus divided by interest payment, was also weaker than major countries, at 4.3 times, compared with Japanese businesses' 14.3 times, German companies' 10.2 times and British enterprises' six times.
"Businesses in these advanced countries have enhanced their interest-paying ability through debt restructuring in the wake of the global financial crisis, but Korean companies have failed to do so," another BOK official said.
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