IMF warns corporate debt distress in Asia

The International Monetary Fund (IMF) has warned that Asian companies’ debt burdens are soaring amid high-interest rates, raising the possibility of default. In South Korea, the share of corporate debt that is likely to default among total corporate debt has far exceeded the global average, raising alarm bells.

The IMF recently wrote on its blog, “Asia must monitor rising corporate debt amid higher interest rates,” noting that “Industries that rapidly increased leverage while interest rates were low that their borrowing is well above levels prior to the global financial crisis.” “Asia’s increased borrowing has augmented the region’s exposure to rising interest rates and heightened market volatility,” it added.

In South Korea, corporate debt with an interest coverage ratio (ICR) of less than 1 accounted for 22.1 percent of total corporate debt from July 2021 to June 2022. This is higher than the global average (16.8 percent) and the Asian average (13.95 percent). The interest coverage ratio is the ratio of operating income to interest expense, and a ratio of less than 1 means that a company pays more in interest than it earns. Therefore, an interest coverage ratio of less than 1 indicates a high probability of default.

Along with Korea, India (31.1 percent), Thailand (28.03 percent), China (25.8 percent), and Indonesia (22.7 percent) also have debt held by companies at risk of default exceeding 20% of total debt. Japan was below the global average at 15.8%.

In its Asia and Pacific Regional Economic Outlook report released earlier this month, the IMF raised concerns about the distressed debt of Korean and Singaporean companies if interest rates rise sharply. Even under a modest downside scenario of a 1.5 percentage point increase in corporate debt rates, the report found that there are a number of marginal firms with interest coverage ratios below 1. In the real estate sector, the IMF warned that South Korea and Vietnam have high levels of bad debt.


Hyoun-Soo Kim kimhs@donga.com · Do-Young Kwak now@donga.com