IMF Analysis Says Firms Are Failing Restructuring

A report by an international development institution said Korean businesses had a chance to improve structure and solvency as the country rode out the financial crisis, but failed in part because they did not make changes that would improve core business.

In a report in the International Monetary Fund quarterly publication Finance & Development, an analyst with the World Bank, William Mako, said Korean businesses, like a number of those in other East Asian countries, remain financially unsound as they failed to shed marginal business and improve profitability.

Companies have yet to recover from the crisis, Mr. Mako said, and that in turn "undermines the health of the financial institutions that extended loans to them."

Mr. Mako proposed that corporate restructuring should be evaluated along three time lines: long-term deterrence of debt-fueled investment, short-term assistance to insolvent but viable companies and mid-term operational restructuring to improve profitability, solvency and liquidity.

While Korea made progress on the long- and short-term reform, little has improved since the end of 1997 in the mid-term goal of operational restructuring, Mr. Mako said. Corporations have been slow to shed marginal businesses and unsustainable debt, leaving them less competitive and less responsive to growth opportunities. New equity and proceeds from the sale of noncore businesses should have been used to retire debt, but most Korean corporations used new equity to acquire additional assets. "Assets grew 9 percent in 1999 while liabilities decreased just 1 percent," Mr. Mako said, based on Bank of Korea figures. Even in companies which privately restructured, the ratio of new assets to debt retired was 4 to 1.

Through state-run banks or public asset management companies, the government can push for operations restructuring, Mr. Mako suggested, but it is reluctant to do so because of worries about job losses and the need for more public bailout funds, often coupled with resentment of foreign investments.

by Kim Young-sae