Recent statistics show the problem associated with zombie companies has not been managed effectively and promptly. — Bloomberg
WHILE there is no globally-agreed upon official definition, zombie firms are widely referred to as those that are risky, unproductive and unviable, yet manage to avoid immediate default, most likely due to continued support from banks, investors or governments, amid misaligned incentives.
The existence of zombie firms is inevitable in any country adopting market capitalism, at least for a certain period and under certain conditions, such as immediately after unexpected shocks like a financial or nonfinancial crisis on a global or regional scale.
Once the effects from such unexpected shock dissipate, economic and financial authorities need to take appropriate measures to minimise the number and financial exposure of these zombie companies to a minimum, given the substantial macroeconomic cost of keeping them alive for an extended period.
This also applies to South Korea, the fourth-largest economy in Asia and a leading adopter of market capitalism.
Yet recent statistics show the problem associated with zombie companies has not been managed effectively and promptly, even as the country struggles to revive growth.
Data from the Financial Supervisory Service shows that the number of marginal companies – those that failed to generate enough operating profit to pay interest on their financial debt for three consecutive years or longer – fell to 88,081 in 2023 from 98,177 the previous year.
However, loans that the top six commercial banks provided to these zombie firms rose to 151.4 trillion won in 2023 from 130.5 trillion won in the previous year, indicating that the average loan amount per company has increased, according to data from a report by a Democratic Party of Korea lawmaker.
It is worrying that this is happening at a time when macroeconomic conditions look set to deteriorate in the coming months, as the US economy cools and the Chinese economy yet to come out of the dark tunnel, while domestic demand remains depressed.
South Korea’s economy posted growth of just 1.4% in 2023, marking its worst performance in modern history, excluding crisis periods.
Major organisations had predicted the country’s economy would recover this year, but the outlook is turning out to be less promising than initially expected.
In August, the Bank of Korea (BoK) forecast the economy would grow by 2.4% this year.
This is far from a significant improvement considering the exceptionally poor performance in 2023, and is particularly frustrating since it is a downgrade from the previous 2.5% projection.
The central bank said private consumption would likely grow only 1.4% this year, down from a 1.8% increase in 2023 and a downgrade from its previous forecast of 1.8% growth.
Capital investment in production facilities is also predicted to grow just 0.2%, a shocking downward revision from the earlier forecast of 3.5% growth.
Moreover, the BoK maintained its projection for next year’s growth at 2.1%, indicating that South Korea’s economy is expected to grow much less than initially anticipated for the 2024-2025 period.
This means the economy is now seen falling far short of fully recovering its potential growth pace from the slump experienced in 2023.
When we look at the issue within the context of a gloomy economic environment, zombie companies pose significant adverse effects on the overall economy in terms of the total factor productivity and capital efficiency.
I understand that policymakers have no choice but to focus more on fighting bigger problems such as surging global inflation and plunging economic growth at home. I also understand that no government can simultaneously tackle various, often conflicting challenges.
There is no simple panacea to solving this problem without impacting the broader economy. However, it is time for policymakers to seriously assess the issue and begin preparing a detailed road map to protect the sound companies from the zombies. — The Korea Herald/ANN
Yoo Choon-sik worked as the chief South Korea economics correspondent at Reuters and is now a business and media strategy consultant. The views expressed here are the writer’s own.
