Increase in Production Costs → High-Interest Bank Loans → Interest Burden... Vicious Cycle in Corporate Cash Flow

KCCI Surveys Financial Conditions of 2,172 Manufacturers
6 out of 10 Companies Rely on Bank Loans for Funding
Only 1 in 4 Uses Internal Reserves or Bond Issuance
"Need to Stabilize Loan Interest Rates and Open Diverse Funding Channels"

Major Risk Factors in Fund Management (Multiple Responses). Photo by Korea Chamber of Commerce and Industry

[Asia Economy Reporter Choi Seoyoon] As the vicious cycle of rising production costs due to inflation and consecutive interest rate hikes continues, the financial burden on domestic companies is increasing.

The Korea Chamber of Commerce and Industry (KCCI) announced on the 16th that a recent survey on 'Corporate Financial Conditions Related to the Recent Economic Situation' conducted among 2,172 manufacturing companies nationwide revealed that companies' financing methods were concentrated on 'bank and securities company borrowings' (64.1%). Companies that responded they raised funds without going through financial institutions accounted for only one in four, with 'internal reserves' (23.9%) and 'stock and bond issuance' (7.1%) following in order.

Corporate reliance on bank loans is steadily increasing. When asked about financing methods that have increased compared to before the COVID-19 pandemic, 64.4% of companies chose 'bank and securities company borrowings,' followed by 'use of internal reserves' (32.2%) and 'government subsidies' (17.0%). Only 3.3% of companies selected 'stock and bond issuance.'

In fact, the scale of corporate bond issuance has significantly decreased recently. According to statistics from the Financial Supervisory Service, the issuance of general corporate bonds dropped by about 4 trillion KRW from 12.905 trillion KRW in the first quarter to 8.8975 trillion KRW in the second quarter of this year, and further halved to 4.6135 trillion KRW over July and August.

Raising funds through bond issuance is also becoming more difficult. The year-on-year decline rate was -13.7% in the first quarter and -43.8% in the second quarter of this year. Even if financing is possible, companies must bear high interest rates. The 3-year BBB- corporate bond yield rose by 2.6 percentage points from 8.5% in early January to 11.1% in early October due to market anxiety and base rate hikes.

Corporate Bond Issuance Scale (Unit: 100 Million KRW). Photo by Financial Supervisory Service

Cash Flow Coverage Ratio in Q2 This Year Down 43% YoY... Rising Loan Interest Rates Top Risk in Fund Management

The cash flow coverage ratio, which gauges companies' ability to pay short-term debt, also plummeted sharply compared to a year ago, reflecting inflation and high interest rates. An analysis by KCCI and Korea Data Rating (KoDATA) of quarterly cash flow coverage ratios of 897 listed manufacturing companies showed that the ratio in Q2 this year was 45.6%, down 43.8% from Q2 last year.

This was due to operating cash inflows decreasing by 36.2% from 48.9 trillion KRW to 31.2 trillion KRW during the same period, while short-term borrowings increased by 17.4% from 60.8 trillion KRW to 71.4 trillion KRW.

Kim Hyunsoo, Director of Economic Policy at KCCI, said, “Compared to the interest coverage ratio, which includes accounts receivable, the cash flow coverage ratio is calculated based on actual cash available for payment, thus more clearly showing companies' capacity to cope. The trend of high interest rates is expected to continue into next year, which is concerning.”

Short-term Debt Status of Listed Manufacturing Companies (Unit: KRW). Photo by Korea Chamber of Commerce and Industry

As the main risk factors in fund management, three out of four responding companies cited 'increased interest burden' (73.3%, multiple responses allowed) due to base rate hikes. This was followed by 'increased foreign currency borrowing burden' (25.2%) due to high exchange rates, 'regulations related to financing' (18.3%), 'reduction in policy support funds' (15.8%), and 'end of principal and interest repayment deferrals' (11.1%).

Many companies pointed to 'restricted cash flow due to sluggish sales' (63.7%), 'increased production costs' (57.5%), and 'high interest burden' (43.6%) as reasons for these financial difficulties.

Corporate Debt-to-GDP Ratio in Korea Up 22.7 Percentage Points in 5 Years... Second Fastest Growth Rate

The debt situation of Korean companies has also been rapidly increasing in international comparisons. According to the Bank for International Settlements (BIS) report released in September, Korea ranked 15th among 43 countries in corporate debt-to-GDP ratio in Q1 this year, rising four places from 19th in 2017.

The corporate debt-to-GDP ratio, which was 92.5% in 2017, increased by 22.7 percentage points to 115.2% in Q1 this year after five years of the COVID-19 pandemic and a high-cost economic environment. This is the second highest increase among the countries compared.

Kang Seokgu, Head of the KCCI Research Department, said, “According to a survey conducted by KCCI last September, the base interest rate level that companies could tolerate considering their breakeven point was 2.91, but the recent rate hikes have exceeded this tolerance level.”

He added, “Now, companies must worry about survival beyond just investment contraction. It is urgent to implement monetary policies considering the domestic economy, increase policy fund support for companies facing short-term liquidity crises, reduce the gap between base rates and market interest rates, and diversify financing methods.”

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