Whereas there isn’t a official definition agreed on globally, zombie companies are extensively known as these which might be dangerous, unproductive and unviable, but which nonetheless handle to keep away from quick default, almost definitely because of continued help from banks, traders or governments, in gentle of misaligned incentives.
The existence of zombie companies might be mentioned to be inevitable for any nation adopting market capitalism, at the very least for a sure interval and beneath sure circumstances, equivalent to instantly after sudden shocks like a monetary or nonfinancial disaster passed off on a worldwide or regional scale.
As soon as the results from such an sudden shock dissipate, financial and monetary authorities have to take acceptable measures to handle the quantity and monetary publicity of those zombie corporations to a minimal, given the substantial macroeconomic value of protecting them alive for an prolonged interval.
This additionally applies to South Korea, which is the fourth-largest economic system in Asia and one of many main international locations adopting market capitalism. But latest statistics reveals the issue related to zombie corporations has not been managed successfully and promptly, even because the nation remains to be struggling to revive development.
Statistics from the Monetary Supervisory Service reveals that the variety of marginal corporations — those who didn’t generate sufficient working revenue to pay curiosity on their monetary debt for 3 consecutive years or longer — fell to 88,081 in 2023 from 98,177 the earlier 12 months.
Nonetheless, loans that the highest six business banks supplied to those zombie companies rose to 151.4 trillion gained ($115.7 billion) in 2023 from 130.5 trillion gained within the earlier 12 months, indicating that the typical quantity per firm has elevated, in accordance with the information, contained in a report by a Democratic Occasion of Korea lawmaker.
Globally, the macroeconomic implications of those unproductive and unviable companies have come to the forefront of the general public debate throughout the COVID-19 pandemic, amid the unprecedented public help supplied to companies to assist them face up to the extreme loss in earnings.
Whereas the preliminary untargeted help was important in mitigating the destructive shock on the economic system, it might have helped zombie companies keep afloat, thus avoiding or delaying a mandatory artistic destruction course of. On the identical time, issues emerged that lenders would fail to correctly acknowledge loans to zombie companies.
Lenders would then have incentives to increase credit score to zombie companies to maintain them alive, creating congestion results on wholesome companies competing with zombie companies, and decreasing total productiveness, funding and employment within the economic system, in accordance with a latest analysis paper revealed by the Worldwide Financial Fund.
In South Korea, it’s worrying that that is taking place at a time when the macroeconomic circumstances look set to deteriorate within the coming months because the US economic system is cooling and the Chinese language economic system has but to come back out of the darkish tunnel, whereas home demand stays depressed for an extended interval.
South Korea’s economic system posted development of simply 1.4 % in 2023, marking its worst efficiency in trendy historical past when excluding disaster durations. Main organizations had predicted the nation’s economic system would get better this 12 months, however the outlook is popping out to be much less promising than initially anticipated.
The Financial institution of Korea forecast in August the economic system would develop by 2.4 % this 12 months. That is removed from a big enchancment when contemplating the exceptionally poor efficiency within the previous 12 months, and it’s extra annoying as a result of the brand new projection was a downgrade from the earlier 2.5 % forecast.
The central financial institution mentioned non-public consumption would doubtless develop just one.4 % this 12 months, down sharply from a 1.8 % improve in 2023 and a large downgrade from its earlier forecast of 1.8 % development. Capital funding in manufacturing amenities was additionally predicted to develop simply 0.2 %, a stunning downward revision from the earlier forecast for 3.5 % development.
Furthermore, the Financial institution of Korea maintained its projection for subsequent 12 months’s development at 2.1 %, indicating that South Korea’s economic system would develop a lot lower than initially anticipated for the 2024-2025 interval. It additionally means the economic system is now seen falling far wanting recovering its potential development tempo totally from the 2023 stoop.
The issue related to zombie corporations turns into much more critical once we have a look at the difficulty within the context of gloomy financial environments, as a result of zombie corporations trigger varied adversarial results on the general economic system when it comes to the total-factor productiveness and capital effectivity.
I perceive that coverage authorities had no selection however to focus extra on preventing greater issues just like the surging inflation globally and plunging financial development at house over the latest years. I additionally perceive that no authorities can sort out varied, typically conflicting challenges concurrently.
Moreover, there isn’t a panacea to resolve the issue in a single stroke with out producing an affect over the broader economic system. However it’s time for coverage authorities to make a extra critical evaluation of the issue and start making ready an in depth street map to guard the sound corporations from zombies.
Yoo Choon-sik
Yoo Choon-sik labored because the chief Korea economics correspondent at Reuters and is now a enterprise and media technique marketing consultant. The views expressed listed here are the author’s personal. — Ed.