Samjong KPMG "Domestic Companies Need to Prepare for Second Wave and Prolonged COVID-19"

"Need for Macro-Level Corporate Crisis Response Capabilities through Systematic Governance">

[Asia Economy Reporter Minji Lee] An analysis has emerged that domestic companies need to prepare for a second wave and prolonged duration of COVID-19.

According to the report "Warning Signals to the Economy: Debt Risks and the COVID Shock" published by Samjong KPMG on the 20th, while the 2008 global financial crisis was caused by excessive leverage of banks and financial institutions, as well as soundness issues related to derivative financial institutions that transferred the crisis to the real economy, the COVID-19 crisis is likely to spread from the real economy to the financial sector due to prolonged complex supply and demand shocks occurring in the real economy.

As of the third quarter of last year, the global debt-to-GDP ratio soared to a record high of 322%, with the debt scale of non-financial corporations explosively increasing by 55% from $48 trillion in 2009 to $74.4 trillion. The issuance of corporate bonds by non-financial companies worldwide also reached a record high of $13.5 trillion last year.

The report pointed out that the quality of corporate debt has significantly deteriorated, which is also a cause for concern. BBB-rated corporate bonds (the lowest investment-grade rating) that downgrade to junk bonds amounted to $3.8 trillion as of the end of last year, accounting for 30% of global corporate bonds. Moreover, the size of high-risk debt such as U.S. high-yield bonds and leveraged loans, estimated at $2.8 trillion as of March this year, exceeds more than twice that of the 2008 financial crisis. The total amount of non-financial corporate bonds maturing worldwide over the next three years is an unprecedented $4.4 trillion.

The report analyzed that the collapse of global industrial value chains is becoming a reality, with global trade severely declining. Due to industrial activity paralysis, not only supply and production but also consumption activities, except for some sectors, are significantly shrinking, facing a complex crisis.

It also reported that bankruptcies of marginal companies suffering from cash flow difficulties due to sales declines are becoming visible, especially in sectors such as retail, tourism, aviation, and energy. The deterioration of the real economy caused by COVID-19 is pressuring corporate liquidity and increasing the possibility of corporate debt defaults. The report diagnosed that the risk of losses in the financial sector could increase due to corporate debt defaults, and it is difficult to rule out the possibility that the crisis could spread to the financial sector, triggering an economic crisis.

Samjong KPMG stated that to assess the possibility of an economic crisis triggered by COVID-19, monitoring is necessary for ▲ the possibility of a second wave of COVID-19 ▲ the development status of vaccines and treatments ▲ the global spread trend of COVID-19 ▲ and the recovery trend of the economy. Considering past pandemic cases and the current status of vaccine and treatment development, the likelihood of a second wave in the second half of the year is high, and the impact of COVID-19 is expected to be prolonged, delaying economic recovery.

The report urged companies to prepare soundness measures and proactively identify and manage risks to strengthen their preemptive response capabilities against the crisis, as a preparation for the highly likely second wave and prolonged COVID-19 situation.

Furthermore, from a policy perspective, it recommended protecting jobs and supporting crisis recovery in key industries experiencing real financial difficulties, and promoting coexistence between large corporations and small and medium-sized enterprises to prevent the collapse of industrial value chains.

Wonduk Cho, Vice President of Financial Industry at Samjong KPMG, emphasized, "The COVID-19 pandemic has severely contracted the economy, pressuring corporate liquidity, and the risk of losses due to the deterioration of financial sector bonds and investment assets continues to increase, raising the possibility of triggering an economic crisis or prolonged economic downturn. Companies must continuously manage enterprise-wide business-related risks to protect corporate safety and soundness, and to maximize liquidity securing and risk management functions, it is necessary to enhance macro-level corporate crisis response capabilities through systematic governance."

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