Korean Businesses Are Experiencing Declining Stability and Financial Health

Korean Firms
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According to a survey released by a major business lobby organization on Monday, South Korean firms have enjoyed revenue growth this year but their fiscal health has worsened owing to higher debt and decreased profitability.

Slowing growth, rising inventories, and increasing borrowing rates are all causes for worry, especially given that the country’s economy is widely predicted to face headwinds next year due to weak exports and global market uncertainty.

“Despite the severe economic situation, companies have put great effort into exports and domestic sales,” said Kang Seok-gu, chairman of the research section at the Korea Chamber of Commerce and Industry.

Credit rating agency KoDATA and the Korea Composite Index (KCCI) gathered data from 1,612 listed corporations, including 160 conglomerates, 778 medium-sized organizations, and 674 smaller firms. The company’s growth, profitability, stability, and inventory turnover were examined.

Total sales during the third quarter of this year are up 19% over the same time last year, across all firms. There has been a slowdown in the pace of expansion, though. When comparing the second and third quarters of 2017 and 2018, the sales growth rate grew by 0.5 percentage points, whereas it decreased by 2.3 percentage points when compared to the same time in 2022.

The business lobbying organization here noted that “large corporations’ operating rates have been cut compared to when they were in the heart of the COVID-19 outbreak.”

While total assets grew by 2.8% from the previous quarter, total liabilities grew by 4.4%, indicating that businesses attempted to grow via the use of debt. The quarter concluded in September.

Total assets climbed by 39 trillion won ($30.5 billion), whereas total liabilities grew by 40 trillion won, indicating that the growth in debt was greater.

This is in part due to the Bank of Korea’s decision to tighten monetary policy in August of last year, when the benchmark interest rate was raised from a historical low of 0.5% to its current level of 3.25.

More rises in key interest rates are expected to be implemented by the central bank in 2019, according to recent hints.

In 2019, “disruptions in supply chains, increasing interest rates, and high energy prices that incur extra expenditures for enterprises are weighing down company prospects,” it warned.

Corporate stability indicators also declined around this period. Third quarter total company cumulative debt ratio (81.4%) and debt dependency (19.4%) both rose from 74.2 and 18.9 percent, respectively, a year ago, due to increases in both external borrowing and internal financing.

Specifically, the debt ratio (the amount of corporate debt relative to equity capital) reached its highest level since the outbreak of COVID-19, with a rate of increase of 7.2 percentage points compared to the previous year, significantly higher than the increase of 2.6 percentage points in 2019-20 when COVID-19 took its greatest toll on the economy.

South Korean businesses will face challenging conditions in 2019 as the prognosis for Asia’s fourth-largest economy remains bleak.

The BOK revised its outlook for the Korean economy in 2023 last week, predicting a 1.7% increase instead of the 2.1% it had predicted in August. The most recent forecast is the lowest it’s been since the onset of the global financial crisis in 2009.

There will be 2.6% GDP growth in 2022, according to the central bank.

 

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