Companies Surrounded by Raw Material Inflation, Monetary Tightening, and Regulations... "No Appetite for Investment" (Comprehensive)

Half of Companies Have No Investment Plans
Numerous Domestic and International Challenges Including Macroeconomic Instability
FKCCI Urges New Government to Implement Deregulation and Tax Support Measures

[Photo by Getty Images Bank]

[Asia Economy Reporter Kim Jin-ho] Famous cosmetics manufacturer Company A planned a domestic facility investment (factory expansion) worth 390 billion KRW last year but encountered the obstacle of 'COVID-19.' The spread of COVID-19 caused a contraction in demand. To make matters worse, during the same period, local companies rapidly rose in the largest export market, China. As a result, Company A decided to reduce its investment scale by about 30% this year. The judgment was influenced by the need to revise investment plans conservatively due to numerous internal and external adverse factors.

◆ One out of two companies has no investment plan = A survey revealed that one out of two major domestic companies still has no investment plan for this year or has not prepared one. Especially, most companies that have set plans intend to maintain or reduce their investment compared to last year. Concerns arise that companies will find it difficult to actively invest due to various internal and external risk factors such as unstable domestic and international macroeconomic conditions.

On the 14th, the Federation of Korean Industries (FKI) commissioned the public opinion research agency Mono Research to survey the '2022 domestic investment plans' targeting the top 500 companies by sales, and announced that more than half (50.5%) of the 105 respondent companies answered this way.

The response indicating no investment plan was 12.4%, and those who had not yet set a plan accounted for 38.1%. The proportion of companies that set investment plans was 49.5%, but among them, 50.0% said they would maintain last year's level. The response that investment would decrease compared to last year was 11.5%. The response that investment would increase compared to last year was 38.5%.

Companies cited unstable domestic and international macroeconomic conditions such as the spread of COVID-19 and rising raw material prices (37.7%) as the reason why four out of ten companies find it difficult to increase investment scale this year. This was followed by deterioration in external financing conditions such as increased loan interest rates and stricter financial institution screening (20.5%), ▲deterioration of business environment including poor operating performance (15.4%), ▲completion of major investment projects (8.5%), and ▲concerns over the spread of regulatory systems (6.0%).

Not only domestic companies but also foreign-invested companies (foreign-invested enterprises) face similar situations. According to the FKI, nine out of ten foreign-invested companies operating in Korea have not set investment plans for this year. Especially, only 8.9% of companies set investment plans this year, and among them, only 22.2% said they would increase investment compared to last year, showing significantly lower figures than domestic companies.

◆ Companies hesitant to invest due to macroeconomic instability = By mid-first quarter this year, half of major companies cited macroeconomic instability as the biggest reason for not establishing or hesitating to establish new investment plans. In particular, supply chain instability of raw materials and the resulting inflationary pressure, which have emerged since last year, accounted for nearly 40%. Amid pessimistic economic outlooks and concerns about stagflation?economic stagnation accompanied by rising prices?there are even worries that companies' investment and employment are in a 'zero visibility' state.

According to the FKI, most reasons for not expanding investment scale (74.4%) stem from vulnerabilities in the external environment rather than internal company circumstances. The FKI explained, "Macroeconomic instability and strengthened regulations in the external environment are leading to reduced investment scale."

Looking at the causes in detail, inflation triggered by raw materials was the highest at 38.9%. As a resource-poor country, Korea imports most raw materials, but due to Russia's full-scale invasion of Ukraine and other factors, prices of most major raw materials have surged. For example, the price of 'naphtha,' used as a raw material for plastics and textiles, is at its highest in over 14 years due to rising oil prices.

Monetary tightening by major countries and the resulting economic contraction (19.4%), and the possibility of new COVID-19 variants (15.5%) were also identified as factors hindering investment activities. In fact, the U.S. is set to raise interest rates for the first time in three years on the 16th. Additionally, disruptions in Chinese industrial production and economic slowdown (10.7%), intensified U.S.-China conflicts, and reorganization of supply chains centered on domestic markets (6.8%) were analyzed to have considerable impact.

The unfavorable domestic investment environment for companies was also cited as a cause. According to the FKI, only one out of ten companies answered that they were 'satisfied (11.4%)' or 'very satisfied (1.9%)' with the domestic investment environment. The remaining nine out of ten companies (86.7%) said the domestic investment environment was 'average or below.' The proportion of responses indicating 'dissatisfaction' was 23.8%.

The FKI suggested that the Yoon Seok-yeol administration should actively promote domestic investment through deregulation. According to the FKI, companies identified the top three policy tasks to revitalize domestic investment as ▲deregulation (30.1%), ▲expansion of tax support (26.8%), and ▲stimulating domestic demand such as consumption promotion (13.6%).

Some voices express concern that if the Ukraine crisis prolongs as a vicious cycle of retaliation between the West and Russia, the damage to domestic companies will inevitably increase. Shinhan Financial Investment stated in a report, "If the conflict between Russia and Ukraine intensifies, energy prices will rise, leading to increased domestic energy prices," and "Due to Korea's high dependence on crude oil and semiconductor supply chain disruptions, the economy will be impacted."

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