Marginal Companies

 

The Bank of Korea announced on Dec. 22 that 10.6 percent, or 2,561, of the Korean firms subject to external audits were zombie companies as of the end of 2014, and that the ratio and number rose by 2.4 percentage points and 710 compared to five years earlier. It added that the ratio of zombie companies soared from 6.6 percent to 10.8 percent in the group of large corporations during the period, whereas it edged up from 8.5 percent to 10.6 percent in the group of smaller firms.

According to the central bank, these chronically marginal companies can be defined as those recording an interest coverage ratio of less than 100 percent for three consecutive years on at least two separate occasions, and that their total debt amounted to 228 trillion won (US$194 billion) as of last year, equivalent to 14.1 percent of total corporate debt.

The Bank of Korea mentioned inefficient corporate restructuring systems as one of the factors of such a rapid increase. “No less than 52 percent of firms still remained in the course of restructuring as of the end of last year, although the processes started in as early as somewhere between 2009 and 2013,” it explained. Another factor is the government’s policy regarding financial assistance. The credit offerings to these types of companies skyrocketed from 22.8 trillion won to 43.7 trillion won between 2011 and the end of June this year. To compound the matter, Korea’s core corporate debt-to-nominal GDP ratio reached 105.3 percent, much higher than the OECD average of 97.1 percent, late last year. The percentage is overwhelmingly higher than those of the United States (69.2 percent), Britain (75 percent) and Germany (54.5 percent).

The central bank also expressed concerns over the possibility of emerging market instability spreading to Korea in the wake of the interest rate hike by the Fed. As of 2014, Korea’s investment in emerging economies totaled US$307.9 billion, 43 percent of its total external investment, and its exports to such economies added up to US$211.8 billion, or 37.6 percent of total exports. “The Korean stock market has a higher level of correlation with those of emerging economies than China or the U.S.,” said the bank, adding, “The possibility cannot be ruled out that the instability in emerging markets spreads to Korea.”

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