"Half of Companies Unable to Pay Interest in Worst COVID-19 Shock"

Bank of Korea 'June 2020 Financial Stability Report'

[Asia Economy Reporter Eunbyeol Kim] If the novel coronavirus disease (COVID-19) crisis continues throughout the year, the number of companies unable to even pay interest with their earnings is expected to exceed half of all companies. Although this is based on a worst-case scenario, it suggests that while providing policy support, structural improvements such as corporate restructuring are necessary to endure the prolonged crisis. A sharp increase in companies unable to cover interest payments could eventually lead to financial institution insolvencies.

According to the 'June 2020 Financial Stability Report' released by the Bank of Korea on the 24th, under the worst-case scenario assuming the COVID-19 shock persists throughout the year, the proportion of companies with an interest coverage ratio below 1 is estimated to reach 50.5%. Last year (32.9%), about one in three companies struggled to cover interest payments.

The average interest coverage ratio of companies is also expected to plummet from 3.7 times at the end of last year to 1.1 times. An interest coverage ratio below 1 means that operating profit for the year is insufficient to cover interest expenses. The debt-to-equity ratio is also projected to surge from 88.8% to 93.1% in the worst case. The proportion of companies with a debt ratio exceeding 200% is expected to reach 40.5%.

Liquidity shortages in industries severely impacted by COVID-19, such as aviation, accommodation and food services, and shipping, are also problematic. Under the baseline scenario, the liquidity shortfall is estimated at 30.9 trillion won, and under the worst-case scenario, it could reach 54.4 trillion won. Among these, about 30% of the liquidity shortage is attributed to marginal companies.

Households burdened with debt are also a concern. Analysis shows that if the increase in unemployment reaches levels seen during the foreign exchange crisis, 458,000 households would not be able to sustain themselves for even one year. For self-employed individuals, if sales shocks similar to those immediately after COVID-19 persist, 301,000 households would not survive beyond one year. Professor Soyoung Kim of Seoul National University’s Department of Economics stated, "If companies cannot pay interest, bankruptcies may follow. In the case of households, especially the self-employed are problematic, and some who have taken out mortgage loans are at risk."

Meanwhile, the Financial Stability Index (FSI), which indicates the overall stability of the financial system, rose to crisis levels during the first quarter. The FSI reached the crisis stage in April (22.3) but has since declined and currently stands at 18.0.

The FSI standardizes 20 monthly indicators across six sectors?banks, financial markets, external, real economy, households, and companies?and displays them on a scale from 0 to 100. It is categorized as normal (below 8), caution (8 to 22), and crisis (22 and above). Previous times when the FSI entered the crisis stage include the foreign exchange crisis (December 1996 to March 1999, peak in January 1998 at 100) and the financial crisis (September 2008 to June 2009, peak in December 2008 at 57).

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