Number of zombie companies in Korea is growing

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Number of zombie companies in Korea is growing

Nearly a fifth of Korean companies couldn’t cover interest payments on their loans with operating profits from 2017 to 2019, according to a local study.  
 
According to a study conducted by the Federation of Korean Industries (FKI), a lobbying group for big businesses, 17.9 percent of Korean companies with more than 50 billion won ($42 million) in assets failed to generate enough operating profit to cover their loan interest, making them “zombie companies” — companies that make enough to keep going but not enough to invest in future growth.  
 
Korea’s ratio of such companies was the fifth largest among 24 Organisation for Economic Cooperation and Development (OECD) countries. The OECD average for zombie companies was 12.4 percent, according to the FKI.  
 
By industry, companies in the services sector struggled most. Thirty-eight percent of them were identified as “zombie companies” in the FKI study, which was far higher than the OECD average for companies in services, which was 10.1 percent. Turkey was the only country among 24 OECD countries that had a higher ratio than Korea’s at 40 percent.
  
“The proportion of zombie companies in services is likely to get even higher considering Covid-19’s impact on leisure, tourism and hotel businesses,” the FKI report said.  
 
Next on the list were real estate and transport services like trucking and freight businesses — 30.4 percent and 24.3 percent of companies in these industries were failing to cover interest payments with operating profit. Food and beverage companies were doing much better — only 4.7 percent of such companies were “zombies.”
 
Canada, Greece, the United States and Spain ranked above Korea with higher proportions, with the top three surpassing 20 percent.  
 
However, the FKI pointed out that Korea’s figures were deteriorating. Korea’s ratio of zombie companies jumped from 15.4 percent in 2017 to 17.9 percent in 2019. During the same period, the United States’ figure rose by 1.2 percentage points while Canada, Spain and Greece saw figures decline by 3.2 to 5.1 percentage points.  
 
Korea’s 2017-to-2019 increase of 2.5 percentage points was the sixth-largest among 24 OECD countries, according to FKI's study.
 
A report in April from the Korea Economic Research Institute (KERI) had an even grimmer analysis: the number of listed zombie companies rose 21.6 percent on year to 90 in 2019, it said. This was the second largest increase behind Japan.  
 
“The stakes are high that zombie companies will increase in the near future due to the new coronavirus. This will put a huge burden on the country’s economy,” said Yoo Hwan-ik, FKI’s head economist for corporate policy. “We need to ease regulations and establish a business environment where these companies can get back on their feet on their own.”
 
BY SONG KYOUNG-SON   [song.kyoungson@joongang.co.kr]
 

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