SEOUL, Oct. 4 (Korea Bizwire) – A growing number of South Korean companies failed to generate enough operating profit to pay tax and interest payments on their debt, potentially raising downside risks in Asia’s fourth-largest economy, data showed Sunday.
Out of 628 listed companies excluding financial firms, 34.9 percent of the companies failed to make sufficient profit to pay down the principal on their debt, up from 24.7 percent in 2010, according to LG Economic Research Institute.
“As the economy still remains repressed, more companies failed to return their debt,” Lee Han-deuk, a researcher at LG institute, said.
The rising number of “zombie companies,” which refer to firms that do not generate enough operating profit to pay tax and interest payments or require constant bailouts, has been considered a factor that is plaguing the South Korean economy.
While troubled companies could take out loans to survive following the 2008 global financial crisis, a prolonged slump can hit back at lenders at a time when the U.S. is set to raise interest rates later this year, experts say.
“Delayed restructuring of insolvent enterprises is raising potential risks in the national economy. The government should prepare measures to prevent such cases,” Lee said.
Economic policymakers have announced a series of measures to tackle the zombie menace problem amid growing economic uncertainties, including slowing growth in the Chinese economy and a looming U.S. interest rate hike.