Cash flow is blocked... Companies face not only halted investments but also rumors of workforce cuts

After Four Giant Steps by the US
South Korea Also Faces Inevitable Consecutive Rate Hikes...Companies on High Alert

[Image source=Yonhap News]

[Asia Economy Reporters Sunmi Park, Kiho Sung, Donghoon Jung, Chaeseok Moon, Seoyoon Choi, Pyeonghwa Kim] As the United States has implemented four consecutive giant steps (raising the benchmark interest rate by 0.75 percentage points each time), South Korea, facing an inevitable benchmark interest rate hike of at least 0.25 percentage points on the 24th, is bracing for aftershocks such as reduced corporate investment, layoffs, and bankruptcies. While expanding investment is crucial to grow companies, demand to support increased production is insufficient, and combined with interest rate hikes and rising exchange rates, it has become difficult to borrow money at low costs domestically or internationally as before.

According to the industrial sector on the 3rd, as companies anticipate increased pressure from the Bank of Korea’s interest rate hikes, the won-dollar exchange rate rise, and inflation-driven raw material cost burdens, they are increasingly adopting austerity measures and preparing to 'endure as much as possible.' The most common method companies have chosen to cut costs is reducing investment.

Hyundai Motor Company, which still has relatively ample liquidity, has reduced its investment plan for this year from 9.2 trillion won announced at the beginning of the year to 8.9 trillion won, prioritizing securing funds first. The imported car industry also reported, "With interest rates continuing to rise, headquarters has issued austerity directives," adding, "Everyone is struggling to get through this period by cutting promotional and operating expenses." The semiconductor industry is preparing to advance supply-demand balance by significantly reducing investment next year. SK Hynix plans to minimize wafer capacity investment and delay some process transition investments. Next year’s facility investment is being considered for a reduction of more than 50% compared to this year, a level comparable to the industry’s facility investment cuts during the 2008 financial crisis.

The aviation industry is concerned about a recurrence of the Eastar Jet crisis, which nearly led to bankruptcy. The financial structure has already deteriorated significantly due to COVID-19, and negative factors continue with increased dollar debt burdens from exchange rate rises and rising jet fuel costs. Jin Air issued 62 billion won worth of perpetual bonds on the 31st of last month to raise funds.

AK Holdings, the parent company of Jeju Air, decided to participate in Jeju Air’s rights offering by investing 109.7 billion won. Jeju Air is pushing for a rights offering of about 320 billion won, but concerns over foreign exchange losses and interest rate hikes have reduced the offering size by about 100 billion won, putting the company in an emergency situation. Asiana Airlines is suffering from capital erosion risk. As of the end of June, Asiana Airlines’ total capital was 204.6 billion won, but bonds to be repaid amount to 1.15 trillion won. Particularly, the sharp rise in the won-dollar exchange rate and interest rate increases have raised interest expenses, which is a concern.

An aviation industry official said, "There is talk that a problem like Eastar Jet’s sudden crisis might occur," adding, "With more airlines than before COVID-19 and the economy expected to be in full recession next year, the anxiety is even greater."

The chemical industry is also focusing on the increased difficulties from additional interest rate hikes, funding burdens, and rising dollar-denominated debt due to exchange rate increases. While exchange rate rises may benefit manufacturing-based export companies in the short term, in the long term, combined with overall global inflation, they can have complex effects on assets, liabilities, and financing, ultimately resulting in a predominantly negative impact.

Due to the heightened economic uncertainty, some complain that it is difficult to properly establish emergency management plans for next year. A representative from a major corporation said, "In times of such great uncertainty, finalizing management plans is essentially meaningless," adding, "We cannot completely stop new investments, but we are proceeding cautiously with priorities."

Economic experts worry that since companies are preparing for survival rather than growth, the pace of investment cuts, layoffs, and bankruptcies may accelerate.

Professor Tae-yoon Sung of Yonsei University’s Department of Economics said, "The magnitude of interest rate hikes by monetary authorities has become so large that even highly creditworthy companies are finding it difficult to raise funds, to the extent that financial authorities are injecting bond market stabilization funds, indicating a serious situation," and added, "Given the current high volatility in international financial markets and the difficult economy, it is clear that companies have reached a stage where they must be cautious about proactive and bold investments using debt and prepare for survival."

He continued, "Regardless of company size, investment cuts and layoffs are expected to continue to some extent, and this is not surprising." Professor Jeong Heo of Sogang University’s Department of Economics also said, "It is a concerning time as even the export manufacturing sector, which has many sound companies, is seeing an increase in marginal companies," adding, "The entire national economy, which heavily depends on export manufacturing, could suffer significant damage."

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