Three Highs Hit Companies: "Not Even Borrowing Money, Let Alone Investing"

High Inflation, High Exchange Rates, and High Interest Rates '3-High Crisis'
Corporate Sentiment Index Falls Below 90 for the First Time in 1 Year and 10 Months

[Asia Economy Reporter Park Sun-mi] The corporate sentiment index has fallen below the 90 mark for the first time in 1 year and 10 months, which is interpreted as a result of the significantly deteriorated business environment due to the so-called ‘three-high crisis’ of high inflation, high exchange rates, and high interest rates. With the Bank of Korea’s big step (a 0.5 percentage point hike in the base interest rate), interest rates have soared, increasing interest burdens and rapidly worsening the financing environment. As borrowing money has become difficult, corporate investment has inevitably shrunk significantly. The sharp rise in the won-dollar exchange rate has severely worsened corporate profitability, and the resurgence of COVID-19 has further dampened consumer sentiment frozen by high inflation. This is the background for concerns that inventory piled up in corporate warehouses will increase even more.

◆A Total Crisis: "Even Borrowing Money Is Difficult"=According to the August Corporate Business Survey Index (BSI) by sector, conducted by the Federation of Korean Industries (FKI) on the top 600 companies by sales on the 26th, employment (103.4) was the only sector showing a positive outlook. All other sectors, including financing conditions (89.6), profitability (89.6), domestic demand (89.9), exports (93.9), investment (98.2), and inventory (105.2), showed negative outlooks. A BSI forecast above 100 means more companies have a positive view of the economy, while below 100 means the opposite.

In particular, financing conditions and profitability have fallen below the 90 mark for the first time in 24 months since August 2020 (financing conditions 88.3, profitability 85.1). In reality, corporate financing environments are rapidly deteriorating as market interest rates soar and fears of an economic recession spread. This is due to the sharp cooling of the corporate bond market, which is a primary financing tool for companies. While the situation for high-grade corporate bonds rated AA or above, considered safe assets, remains stable, bonds rated A or below have seen yields soar to 7-8% annually due to weakened investor sentiment among institutional investors. Issuance volume is also sharply declining. According to the Korea Financial Investment Association, corporate bond issuance this year reached 53.4249 trillion won as of the previous day, the lowest in four years since 2018.

The market capitalization of KOSPI-listed companies stood at 1,894.264 trillion won based on the previous day’s closing price, shrinking nearly 20% from 2,211.373 trillion won at the beginning of the year. Additionally, funds raised through IPOs by 56 newly listed companies from January to July decreased by more than 80% compared to the same period last year.

Corporate profitability is also taking a direct hit from the sharp rise in the won-dollar exchange rate. The exchange rate, which traded around 1,121 won in June last year, recently surpassed 1,300 won. On this day, the won-dollar exchange rate opened at 1,312.0 won in the Seoul foreign exchange market. This has increased the burden of dollar-denominated debt for companies and drastically reduced profits due to rising import prices of raw materials.

According to a recent survey by the FKI targeting the top 1,000 companies by sales, the appropriate won-dollar exchange rate level for securing export profitability for Korean companies in the second half of this year was found to be 1,206.1 won. The FKI forecasted, "If the high exchange rate approaching 1,300 won persists for a considerable period, additional deterioration in export profitability due to rising import raw material prices will be inevitable."

◆"Time for Emergency Management"...Reconsideration of Large-Scale Investments=Another factor increasing corporate concerns is the growing inventory piled up in warehouses due to sluggish sales caused by reduced consumption. A sharp increase in inventory leads to reduced investment, which can result in job cuts and economic recession.

According to the Financial Supervisory Service, Samsung Electronics’ inventory assets in the first quarter amounted to 49.8477 trillion won, a 54% increase compared to the same period last year. The inventory turnover period (the time it takes for inventory to be converted into sales) averaged 94 days, about two weeks longer than usual, marking a record high. Samsung Electronics is currently implementing flexible operations to adjust production and inventory levels of products such as smartphones and home appliances, considering the declining demand atmosphere. LG Electronics, which recorded inventory assets of 10.2143 trillion won (27.7%) in the first quarter, is facing an unavoidable increase for the second consecutive quarter. In the BSI inventory index, exceeding the baseline of 100 indicates a negative outlook (excess inventory). In August’s BSI, manufacturing scored 107.2, higher than non-manufacturing at 103.1. Particularly, machinery and equipment inventory was high at 121.4. This is why negative forecasts suggest possible links to worsening employment and investment.

As negative outlooks grow due to domestic and external adversities, companies are canceling or postponing investment plans one after another. SK Hynix recently delayed its expansion plan for the Cheongju plant in Chungbuk. LG Energy Solution also decided to fully reconsider its plan to build a 1.7 trillion won battery factory in the United States, which was scheduled to start construction in the first half of this year. There is even a crisis theory that the more than 1,000 trillion won in mid- to long-term investment plans announced by major conglomerates since the new government took office could shrink if economic uncertainty continues.

Companies have hurriedly entered emergency management mode. POSCO recently launched group-level emergency management to proactively prepare for complex economic shocks such as demand contraction, rising costs, and supply chain crises amid growing possibilities of a global economic recession. Samsung held a major affiliates’ presidents meeting last month for the first time in three years to discuss response strategies for emergency situations. Hanwha also declared an emergency management system for its energy sector affiliates.

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