World Economy

South Korea Corporate Restructuring to Cost $27b

South Korea Corporate Restructuring to Cost $27bSouth Korea Corporate Restructuring to Cost $27b

The cost to restructure debt laden shipping and shipbuilding industries in South Korea will be as much as 31 trillion won ($27 billion), according to the International Monetary Fund.

In a report, “Benefits and Costs of Corporate Debt Restructuring: An Estimation for Korea,” the IMF said it will take about 10 years to recoup the costs, with the restructured industries contributing to economic growth by restarting investment and hiring new employees, Yonhap reported.

“After years of rapid growth, many South Korean export-oriented industries face headwinds from a global economic slowdown. Shipping and shipbuilding are especially affected,” the IMF said. “Steel and petrochemicals may become distressed if the global slowdown deepens. The technology intensive industries, such as automobiles and electronics, are exposed to intensifying international competition.”

It said corporate debt vulnerabilities were high, and the government was taking steps to “agree, and then swiftly implement, plans for the operational and financial restructuring of vulnerable firms.”

South Korea is an instructive case to study benefits and costs of corporate debt restructuring, it noted.

It assessed the benefits and costs of debt restructuring of firms that had an interest coverage ratio below 1 for three consecutive years.

“With the slowdown of global trade, the growth rate of South Korean corporate earnings, particularly in export-oriented manufacturing and shipping, has been declining and has recently turned the estimated cost of corporate restructuring in the shipping and shipbuilding industries negative. Our method gives that cost at about 31 trillion won in the adjusted baseline,” the IMF said.

This compares with the 12 trillion won support package for the state-owned Korea Development Bank and Export-Import Bank of Korea and about 10 trillion won in internal loss-absorption capacity available in those banks.

The report points out that moving a firm from an ICR below 1 to above it through restructuring will increase its investment and its hiring of employees annually.

It said the cost will be compensated for by an increase in future GDP growth thanks to higher corporate investment and rises in employment in the subsequent years.

“The key qualitative result is that corporate debt restructurings pay off in the medium term: their economic cost is recouped over about 10 years,” the report said.

However, the South Korean government has already injected nearly 40 trillion won into the shipbuilding and shipping companies in the past.

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