Address zombie businesses firstPresident Park Geun-hye observed that major changes in the global economic context demand responsive policy actions. She demanded suggestions during the National Economic Advisory Council meeting at the presidential office. She said risks from the world’s two largest economies due to the planned hike in U.S. interest rates and instability in the Chinese economy, and expected changes in global economic and trade orders from the launch of the Trans-Pacific Partnership (TPP), require structural changes in the local economy.
Structural reforms have become necessary for the Korean economy, but they won’t have any real effect unless the industrial and corporate sector is revamped by clearing out debt-ridden zombie enterprises. According to the Korea Credit Guarantee Fund report to the National Assembly, a total of 3,741 companies are on long-term credit guarantees from the state institution as of August. Their guarantees amount to 2.4 trillion won ($2.1 billion). Of those, 600 are on a guarantee program of more than 20 years, and six are on more than 30 years. Policy funds are being abused to sustain these firms.
Large companies are no different. According to the Bank of Korea, 3,295 companies, or 15.2 percent of total companies, could not pay interest on their debt with their operating profit last year. About 73.9 percent had been on the troubled list for 10 years. With one out of six large companies unable to pay off their debts, the economy hardly can improve. Shipbuilding, shipping and the steel industry claim their ailing counterparts were drowning the entire industry. Policy funds must not be used to simply keep weak companies or industries afloat.
Financially weak companies can pose a challenge to Korea participating in the TPP framework. The TPP has a provision on restricting subsidies from state enterprises in order to promote corporate competitiveness without government favors and patronage. Other members could complain about the financing support from Korean state companies like the Korea Development Bank and Credit Guarantee Fund. The zombie mess needs a cleanup before Seoul embarks on TPP negotiations.
These companies have been sustained for political rather than economic reasons, fearing union backlashes to shutdowns and layoffs. The presidential office must show resolve to root out corporate weeds and make the corporate habitat healthier.
JoongAng Ilbo, Oct. 8, Page 34