According to a recent analysis by the Korea Economic Research Institute (KERI), one in five listed companies in South Korea are classified as "marginal firms," meaning they are unable to cover their loan interest with their operating profits.
The analysis, which compared listed companies in South Korea with those in five major countries (the United States, Japan, Germany, the United Kingdom, and France), found that South Korea's proportion of marginal firms was 19.5% as of the third quarter of last year. This was the second highest proportion among the six countries, following the United States at 25.0%.
A marginal firm is defined as a company whose interest coverage ratio (operating profit divided by interest expense) has been below 1 for three consecutive years.
The sectors with the highest proportion of marginal firms in South Korea were real estate (33.3%), professional, scientific, and technical services (24.7%), wholesale and retail trade (24.6%), and information and communication (24.2%).
South Korea also had the second highest proportion of "temporarily marginal firms," which are companies with an interest coverage ratio of less than 1 in the current year. The United States had the highest proportion at 37.3%, followed by South Korea at 36.4%.
The increase in the proportion of marginal firms in South Korea was also the second largest among the six countries, with a 12.3% point increase from 7.2% in 2016. This compares to a 15.8% point increase in the United States.
The number of marginal firms in South Korea increased from 163 in 2016 to 440 in the third quarter of last year.
The sectors with the largest increases in the proportion of marginal firms in South Korea were professional, scientific, and technical services (20.7%p), information and communication (19.7%p), manufacturing (10.7%p), and wholesale and retail trade (9.6%p).
The KERI noted that the increase in marginal firms was greater for KOSDAQ-listed companies than for KOSPI-listed companies, suggesting that smaller businesses are being hit harder by the economic downturn.
The KERI called on the government to strengthen institutional support for businesses and to refrain from discussing revisions to the Commercial Act that are not in line with global standards.
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