One in Three Export Manufacturers Faces Worsening Financial Conditions... "Increased Interest and Cost Burdens"

Survey on the Financial Conditions of Top 1000 Export Manufacturing Companies

[Asia Economy Reporter Park Sun-mi] A survey has revealed that large export companies are experiencing financial difficulties due to the impact of COVID-19, ongoing interest rate hikes since last year, and rising raw material prices.

On the 28th, the Federation of Korean Industries (FKI) commissioned market research firm Monoresearch to conduct a financial condition survey targeting export companies engaged in manufacturing among the top 1,000 companies by sales (102 companies responded). The results showed that one in three export manufacturing companies (31.4%) reported that their financial condition has worsened compared to the same period last year. The number of companies reporting a deterioration in financial condition was more than twice that of those reporting improvement (13.7%).

Companies cited poor sales or an increase in accounts receivable (39.6%), increased operating costs such as raw material and labor costs (37.5%), and increased debt repayment and interest burden (9.4%) as the main reasons for the worsening financial condition.

The financial conditions of companies were found to be significantly affected by interest rate hikes and rising raw material prices. Responses indicating that interest rate hikes and raw material price increases negatively impacted financial conditions accounted for 80.3% and 84.3% of all respondents, respectively, showing that the majority of companies feel a heavy burden from interest and cost increases.

Due to the continued rise in interest rates, companies expect interest expenses to increase by an average of 8.3% this year compared to last year, with 33.4% of companies anticipating an increase of more than 10%. Additionally, 64.7% of respondents said that exchange rate increases negatively affected their financial conditions. The FKI analyzed that companies felt the negative effects of increased interest burdens on imported raw material prices and foreign currency-denominated debt more strongly than the positive effects of increased sales (exports) due to exchange rate rises.

Companies reported that they are currently facing the greatest difficulties in securing funds through new loans and loan maturity extensions (23.5%) and managing exchange rate risks (20.3%). Other challenges include accounts receivable collection (17.0%), credit rating management (12.4%), and export-import financing (11.1%). The FKI analyzed that due to losses caused by sudden exchange rate fluctuations and poor accounts receivable collection leading to unstable cash flow, combined with worsening loan conditions due to rising interest rates, export companies are experiencing difficulties in financing.

Meanwhile, despite the challenging financing environment, companies expect their funding needs this year to be similar to or even higher than last year. When asked about their funding demand outlook compared to the previous year, more than half (65.6%) of companies anticipated funding needs to be similar to last year, while 31.4% expected an increase. The sectors expected to require the most funding this year are raw material and component purchases (37.6%), facility investment (28.1%), and labor and management costs (17.0%), in that order.

Additionally, companies indicated that the appropriate exchange rate for smooth financing in Korea (KRW-USD base rate) is 1,144 won. Considering that the average exchange rate in March was 1,224 won, the FKI expressed concern that if the high exchange rate trend continues, companies will face difficulties in financing.

Choo Kwang-ho, head of the FKI Economic Headquarters, stated, “With the recent U.S. Federal Reserve interest rate hikes, a chain reaction of rate increases in Korea is expected, and if the Ukraine crisis prolongs, companies’ financial conditions are likely to worsen further.” He emphasized, “While focusing on risk responses such as stabilizing raw material supply and exchange rates, policy financial support should be expanded to alleviate the burden on companies.”

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