The number of ‘zombie companies’ at an all-time high

Last year, more than four out of every 10 Korean companies were classified as 'zombie companies,' unable to cover their loan interest payments with their annual earnings. This marked the highest level since record-keeping began in 2009. Additionally, these companies' debt-to-equity ratios and reliance on debt reached their highest levels in seven years. Given the expected persistence of high-interest rate trends from the U.S. amid the deep economic downturn, companies are walking on thin ice.

According to data released by the Bank of Korea, the share of companies with an interest coverage ratio of less than 1 (interest expense divided by operating profit) stood at 42.3 percent last year, marking an increase of 1.8 percentage points from the previous year. The debt-to-equity ratio and reliance on debt, indicators of a company's stability, reached their highest levels in seven years since 2015. As companies simultaneously grappled with high-interest rates and an economic downturn, their growth potential and profitability dwindled, and polarization among industries and companies intensified.

As exports and domestic demand decline, businesses are feeling the pinch even more this year. In the second quarter of this year, corporate revenue recorded negative growth for the first time since the fourth quarter of 2020, when the pandemic was at its height. Forecasts for the second half of the year are becoming bleaker. With the expiration of the loan repayment moratorium for small and medium-sized enterprises and micro-entrepreneurs at the end of last month, companies' debt burdens are on the rise.

As companies' fundamentals deteriorate, the real economy and the financial system could face a critical blow if debt-laden marginal firms bust in a series. We must take swift action to prevent this bomb from detonating. Distinguishing between blue-chip companies experiencing temporary financial difficulties and insolvent companies with no chance of recovery and restructuring them drastically is necessary. The Corporate Restructuring Promotion Act, which expired on Nov. 15, should be reintroduced through legislation. The Korean economy should not be pushed into a crisis due to neglecting zombie companies for fear of immediate pain.