Korea’s top economic policymakers are slowly awakening to the need for massive corporate restructuring, but they still seem to lack the determination required to face the tough challenge.
The prolonged stagnation of both the world economy and the Korean economy has seriously eroded corporate profitability, leaving the balance sheets of many domestic companies in tatters.
The dimension of the problem was brought into focus by the Bank of Korea in June. In its Financial Stability Report, it shed light on the rapid growth of “marginal” firms.
The BOK defines a company marginal if it is unable to earn enough operating income to cover its interest expenses for three consecutive years.
The central bank found that among companies subject to external audits, the proportion of marginal — in other words nonviable — firms expanded from 12.8 percent (2,698) in 2009 to 15.2 percent (3,295) as of end-2014.
One alarming finding was the rapid increase of zombie firms among large enterprises. The share of marginal firms among big companies jumped from 9.3 percent in 2009 to 14.8 percent in 2014, almost equal to the share of marginal small firms that edged up to 15.3 percent in 2014 from 13.5 percent in 2009.
The BOK’s report pointed to the urgent need to carry out large-scale corporate restructuring in both the small and large firms.
Large enterprises offer bigger headaches as their creditor banks cannot restructure them without suffering a sharp increase in loan losses and a drop in profitability. This is why banks are lukewarm about putting their struggling large corporate customers back in shape.
As there is little incentive for banks to take on the unpleasant job of revamping large corporations, economic policymakers need to jolt them into action.
But economic officials are also reluctant to step up because they abhor being held accountable for an increase in corporate bankruptcies and unemployment due to banks’ decisions to stop supporting hopeless firms.
They also fear being dragged into controversy over favoritism that could arise if they twist the arms of creditor banks to offer generous loans to ailing but viable companies to help them shape up.
This tendency among top officials to shirk responsibility hampers close cooperation among the ministries involved in corporate restructuring.
To create a more positive atmosphere, Finance Minister Choi Kyung-hwan weighed in. Pledging to steadily press ahead with corporate restructuring, he offered to play a coordinating role when officials from different ministries are unable to reach a decision.
But Choi’s commitment is questionable, given that he may leave his post soon to run for the general elections slated for April.
Yim Jong-yong, chairman of the Financial Services Commission, also hardly sounded convincing when he stressed that more funds would be allocated to start-ups rather than zombie companies.
But the authorities have kept repeating this for years without taking action against nonviable firms that have managed to stay afloat on continued government largesse.
Now it is time for top officials to step up to the plate as the urgency for restructuring is increasing. It is only a matter of time before the U.S. Federal Reserve starts to hike interest rates. As rising interest rates would make the debt burden of financially troubled companies all the heavier, restructuring should start before the interest rate cycle starts turning. Top economic officials need to push for restructuring in a more determined way.
