The average debt ratio of South Korea’s listed firms has been cut by about 70 percent from the late 1990s, showing a substantial improvement in financial soundness of Korean corporations.
According to a report released by local market research firm Korea CXO Institute on Dec. 6, the debt-to-equity ratio of the nation’s top 1,000 listed companies by sales stood at 174 percent on average as of the first half of this year, down from 589 percent in 1997 when the government had to look to the International Monetary Fund (IMF) to prevent a national default crisis.
The number of the so-called high-risk firms with a debt ratio exceeding 400 percent also significantly shrank from 342 to 61 over the same period. When a company has a debt ratio falling below 200 percent, it is regarded as financially sound. A debt ratio of 300 percent or higher means a firm’s borrowing costs affect its net profits, and 400 percent or higher means a company is on the brink of bankruptcy.
In particular, CXO Institute said that the South Korean economy already showed clear signs of serious economic crisis in 1996, a year prior to the Asian financial crisis, as the average debt-to-equity ratio of 1,000 listed companies already reached 463 percent and the number of high risk firms among them amounted to 299
It means that the government could have avoided the national disgrace of IMF bailout if it had disclosed foreign exchange reserves information in a transparent manner and managed the firms’ high debt rates in stages at that time.
While the government was sitting on its hands, the amount of 1,000 listed companies’ debts surged from 569 trillion won (US$507.36 billion) in 1996 to 727 trillion won (US$648.24 billion) a year later. The amount of their capital showed little change at 123 trillion won (US$109.67 billion) but their debts grew as much as 150 trillion won (US$133.75 billion) in one year, worsening the financial soundness.
The debt ratio of 1,000 listed firms remained high at 496 percent even in 1998 after the government sought an international bailout. However, the figure dramatically decreased to 305 percent in 1999 and 264 percent in 2004. Since then, it fell to the 200 percent level and maintained at the 100 percent level after 2010.
The total amount of their debts stood at 2,162.94 trillion won (US$1.93 trillion) and that of their capitals came to 1,246.62 trillion won (US$1.11 trillion) as of the first half of the year.
Oh Il-sun, director of the Korea CXO Institute, said, “South Korea is less likely to go through a liquidity crisis since the government has started managing the nation’s corporate debt ratio after the Asian financial crisis. However, another dark cloud hangs over the South Korean economy as the competitiveness of the nation’s major industries, including automobiles and shipbuilding, has weakened dramatically.”