Construction Investment Declines, Up to 7,000 Insolvent Construction Companies

[Asia Economy Reporter Yoo In-ho] An analysis has emerged that domestic construction investment in South Korea is expected to decrease by about 3% this year due to increased uncertainty caused by the novel coronavirus infection (COVID-19).

Concerns are growing that COVID-19 will have a negative impact on the entire construction industry, as financial risks for construction companies increase and the number of insolvent companies could reach up to 7,000.

On the 20th, the Korea Construction Policy Research Institute forecasted in a report titled "Impact of the COVID-19 Situation on the Construction Industry and Response Measures" that construction investment, mainly private investment, will decrease by about 3% compared to last year.

This is an upward revision of the decline from the institute’s internal forecast of a 1.8% decrease in construction investment. The institute expects the government to increase public construction investment by 6% to minimize the economic downturn caused by COVID-19, while private construction investment, which holds a large share in the industry, is inevitably expected to decline by 7%.

The annual overseas construction order forecast was also revised downward by 21.4%, from $28 billion to $22 billion. This is due to concerns over delays and cancellations of overseas construction orders caused by the COVID-19 situation, and the negative order situation in the Middle East, the main market, due to the sharp drop in oil prices. Overseas orders showed signs of improvement, approaching $10 billion until February this year, but are expected to contract after the second quarter.

The institute also predicted that financial risks for construction companies will increase as problems such as schedule delays and cost increases occur at domestic and overseas construction sites.

According to the institute, construction work was suspended at about 30 domestic construction sites due to confirmed COVID-19 cases until mid-March this year. The institute expressed concerns that if the COVID-19 situation prolongs, it will become difficult to secure foreign workers, worsening labor shortages, and disruptions will occur in the supply of construction materials such as plywood, tiles, and stone, which are highly dependent on imports.

It warned that if construction work resumes simultaneously after the end of COVID-19, shortages in material supply will cause schedule delays and construction cost increases, which could lead to disputes between construction companies and clients over contract terms and schedules.

This is because clauses that recognize infectious diseases as force majeure and allow for schedule extensions and construction cost coverage without fault of the construction company are not clearly defined in domestic public contracts and overseas construction orders.

Due to these negative domestic and international impacts, the proportion of marginal (insolvent) construction companies in South Korea is expected to increase from 10.4% in 2018 to between 11.5% and 13.9% this year. Considering there are about 50,000 domestic construction companies, this means the number of insolvent companies could increase from about 5,000 to up to 7,000.

Accordingly, the institute argued that support measures for construction companies are necessary. It suggested expanding financial support to secure liquidity for construction companies, increasing tax support such as resident tax (business place tax) for employees, temporarily expanding negotiated contracts, preparing measures to secure appropriate construction costs, and expanding investments in aging infrastructure and living SOC (Social Overhead Capital).

Park Seon-gu, the research fellow who conducted this study, said, "Due to the COVID-19 situation, a short-term decrease in construction investment and an increase in corporate financial risks are inevitable," adding, "It is necessary to turn this into an opportunity for a turnaround that can accelerate the smartization and high value-added transformation of the construction industry in the long term."

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