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South Korea’s zombie companies threaten ‘economic powder keg’

The plant of South Korea's Daewoo Shipbuilding is seen in Koeje island of South Kyongsang province, about 470 km southeast of Seoul May 15, 2001.
Lee Jae Won | Reuters
The plant of South Korea's Daewoo Shipbuilding is seen in Koeje island of South Kyongsang province, about 470 km southeast of Seoul May 15, 2001.

South Korea is facing "an economic powder keg", with a growing number of companies unable to service their debt with income, according to figures released on Thursday.

The new data underline the magnitude of the challenges facing Asia's fourth-largest economy which, despite longstanding pledges of reform, remains firmly in the grip of so-called zombie companies.

The nation recorded more than 3,278 zombie companies, including 232 listed groups, in 2015 — a 17 per cent jump from 2012, according to the latest official data, prepared by the Bank of Korea and Financial Supervisory Service.

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The data capture the most up-to-date figures and illustrate the pace of decline seen recently for the South Korean industrial economy.

"The government should thoroughly control corporate debt to keep it from becoming an economic powder keg," said Kim Jong-min, a lawmaker who published the figures on Thursday.

The report will be unwelcome reading for new South Korean president Moon Jae-in, who has made reinvigorating the stuttering economy his top priority.

Once a so-called Asian tiger, GDP growth in South Korea has slowed to about 2.7 per cent a year. Many South Koreans, especially in the younger generation, are pessimistic about their prospects.

"For the last two to three years we have had exceptionally slow GDP growth, which has not been sufficient to increase employment and consumption. This leaves these zombie companies with little room to improve their cost structure," said Jun Kwang-woo, former head of the Financial Services Commission.

Defined as a group that is unable to cover interest expenses with operating profits for three consecutive years, zombie companies use cheap loans to stay afloat — a situation that is increasingly precarious amid the prolonged economic slowdown and increased competition from the likes of China.

According to the report by Mr Kim, listed zombie companies employ about 100,000 people and have sales equal to more than 4.5 per cent of South Korea's GDP.

While accounting for just 7 per cent of the total number of marginal businesses in South Korea, these listed companies hold as much as 45 per cent of the debt.

A key offender is Daewoo Shipbuilding, which is being teed up for a $2.6bn bailout. The company, which employs more than 10,000 people, could face cash shortages of more than $4bn over the next two years, according to South Korea's financial watchdog.

"The new government should immediately tackle this overdue problem. If these marginal companies are left as they are, their illness could spread to the entire economy," said Park Ju-geun, head of research group CEO Score.

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"Although many of the debt-laden companies are tightening their belts, they still have a long way to go in terms of restructuring, especially in the shipping and shipbuilding sectors. They should have undertaken tough, painful restructuring over the past several years, but they have not."

In 2015, financial officials announced plans to eliminate zombie companies and reduce the corporate debt burden, which has piled up continuously since the 2008 global financial crisis.

However, the situation "has not improved by and large," said Mr Jun, adding that the government is probably wary of the potential social impact of restructuring such groups, many of which are small and medium-sized enterprises.

"There is also a tendency to maintain the status quo, with the hope that if the economy improves these firms can get back on their feet," he said.

Additional reporting by Song Jung-a and Kang Buseong