South Korean firms squeezed by tight credit, debt

As smaller firms suffer, government stimulus package targets more lending

PUBLISHED : Thursday, 14 August, 2014, 1:28am
UPDATED : Thursday, 14 August, 2014, 1:28am

South Korea's smaller firms are struggling as credit tightens and the cost of servicing debt rises - a development that could put more strain on the economy at a time of uneven global growth.

The government is trying to shore up faltering growth, with the new finance minister's stimulus package including funding for banks of up to three trillion won (HK$22.41 billion) to expand lending and pressure for a cut in interest rates which the central bank is expected to deliver today.

Small and medium-sized enterprises, which account for about 90 per cent of the corporate workforce and almost half of aggregate production, are struggling to raise funds amid a drying-up of the commercial paper market and reduced access to local bond markets following some defaults last year.

"South Korean corporate profitability is pressured and debt service ratio is declining and the growth outlook is dim," said Raymond Yeung, Hong Kong-based analyst with ANZ.

Corporate profitability is pressured and … the growth outlook is dim

The premium charged for lending to lower-rated corporate borrowers has risen sharply. The average corporate bond yield differential between firms rated BBB-minus and AAA has risen to 2½-year highs of more than 600 basis points.

The Bank of Korea said the number of "marginal companies" - where cash generated from operations is less than interest costs for three straight years - had risen to 2,965 at the end of 2012 from 2,019 at the end of 2009, "undermining the engine for growth of the … economy".

Analysts said monetary easing would have only limited benefits.

Barclays analyst Waiho Leong said: "The one thing the bank could do more is to continue to expand lending facilities, via soft loans to banks which can be used to lend to SMEs."

That could provide some relief to companies such as Dongbu Steel which has 90 per cent of its debt coming due in two years time, and Tongyang, all of whose debt is due by the end of next year.

The gloomy outlook has prompted Finance Minister Choi Kyung-hwan to deliver an US$11 billion stimulus package and other measures to prop up the economy. Choi has warned that Korea risks slipping into stagnation, while overt pressure for monetary easing has seen the central bank row back on its hawkish stance.