Profitability Decline Leads to Largest Corporate Net Fundraising in Over 7 Years

Corporate Net Fundraising of 18.9 Trillion KRW in Q3 2019
Household Disposable Funds Increase as Real Estate Investment Demand Declines

[Asia Economy Reporter Kim Eunbyeol] In the third quarter of last year, as corporate profitability weakened, the gap between borrowed money and earned money widened to the largest level since the second quarter of 2012. Household surplus funds increased compared to the same period last year due to a decline in real estate investment demand. Although the government collected a significant portion of the taxes it had released to stimulate the economy, it did not reach the same level as the same period last year.

According to the "2019 Q3 Financial Flow (Provisional)" released by the Bank of Korea on the 9th, the net fund procurement scale of non-financial corporations in the third quarter of last year was recorded at 18.9 trillion won. This is an increase of more than 10 trillion won compared to the net fund procurement scale of 8.8 trillion won in the third quarter of 2018, the same period of the previous year. The net fund procurement scale of corporations recorded the highest level since the second quarter of 2012, when it reached 26.7 trillion won. If this trend continues, the annual net fund procurement scale of corporations is expected to exceed 50 trillion won for the year 2019.

Net fund procurement is the amount obtained by subtracting borrowed money (procured funds) from money managed through deposits, insurance, stocks, etc. If the value of managed funds minus procured funds is negative, it is called net fund procurement; if positive, it is called net fund operation.

The expansion of net fund procurement in the third quarter of last year was largely due to a significant decrease in the scale of fund operation. The scale of corporate fund operation in the third quarter was 9.8 trillion won, sharply down from 41.6 trillion won in the same quarter of the previous year. Fund procurement was 28.7 trillion won, which decreased compared to 50.4 trillion won in the same period of the previous year, but was actually lower than the 29.7 trillion won in the second quarter of last year.

A Bank of Korea official stated, "Fund operation is linked to corporate profits, and it is interpreted that the operating capacity deteriorated as corporate profitability weakened."

As of the end of September last year, the financial assets of non-financial corporations stood at 2,735 trillion won, a decrease of 6.8 trillion won compared to the end of June. On the other hand, financial liabilities of non-financial corporations increased by 24.7 trillion won during the same period. As a result, for the first time since the third quarter of 2016, corporate financial liabilities exceeded financial assets. Although corporate financial liabilities can be interpreted as investments to increase future production, since real investments did not significantly increase in the third quarter of last year, it is difficult to interpret that corporations procured funds for investment. A Bank of Korea official explained, "It is seen that corporations procured funds in advance when financial conditions were favorable to proactively prepare for uncertainties."

With a decline in real estate investment demand, household surplus funds (net fund operation) recorded 17.6 trillion won, an increase of more than 5 trillion won compared to 12 trillion won in the same period last year. However, when compared quarterly, household net fund operation decreased compared to 26.7 trillion won in the first quarter and 23.5 trillion won in the second quarter of last year. This suggests that household loans for real estate purchases increased compared to the first half of last year. A Bank of Korea official explained, "Housing fund demand increased in the third quarter compared to the first and second quarters due to new apartment sales and move-in volumes."

The government’s treasury expanded. The government's net fund operation in the third quarter was 16.6 trillion won, a significant increase compared to 1.7 trillion won in the previous quarter. This was because the government began to finance through tax revenue in the second half of the year. However, the reason net fund operation decreased compared to the third quarter of the previous year was that the national bond repayment ratio was not as large as in previous years. The net fund operation scale slightly decreased compared to 17.9 trillion won in the same period last year. This is interpreted as the government maintaining an active fiscal policy even in the second half of last year.

This content was produced with the assistance of AI translation services.