Necessity mixed with concern on restructuring

A bunch of figures suggest Korea’s economy has been held back, among other worsening conditions, by its weakening manufacturing sector saddled with excess capacity and declining profitability.

The rate of contribution by manufacturing industries to the country’s annual growth in gross domestic product plummeted from 55.4 percent in 2010 to 11.5 percent in 2015, according to data from the Korea Economic Research Institute. The growth rate of their production capacity was down from 7.9 percent to 1.2 percent over the cited period.

Most of the profitless zombie companies, whose number rose from 2,698 in 2009 to 3,295 in 2014, were manufacturing firms.

The proportion of companies that failed to make interest payments with operating profits for three consecutive years in shipbuilding, steelmaking and petrochemicals sectors increased from 3.4 percent, 3 percent and 5.7 percent in 2009 to 10.7 percent, 9 percent and 6.4 percent in 2014, respectively, according to data from the Bank of Korea.

Figures recently released by the Financial Supervisory Service showed that 159 corporations saw their credit rating degraded last year, the highest number since 1998 when the country’s economy was faltering amid a foreign exchange crisis. An official at the agency said they were mostly in such sluggish sectors as shipbuilding, petrochemicals, steelmaking and construction.

Economic policymakers have recently been accelerating work to overhaul loss-making and debt-laden industries, which they undertook last year only to ease its pace in the run-up to the general election earlier this month. They are seeking to match restructuring overcapacity sectors with nurturing new industries that can help boost the country’s growth potential over the long term.

Finance Minister Yoo Il-ho, who doubles as deputy prime minister for economic affairs, last week pledged to push for what he called the renovation of the industrial structure, along with existing structural reforms in labor, education, finance and the public sector.

The government this week plans to announce a string of measures designed to facilitate restructuring and reshape the country’s industrial landscape.

In a move cautiously welcomed by economic commentators, opposition leaders last week suggested they would be ready to cooperate with the government in restructuring work.

The coming months are seen to be a crucial period for pushing through industrial restructuring before attention is being diverted to next year’s presidential election.

“Any further delay in restructuring will increase costs exponentially and hurt growth potential,” said Kim Joon-kyung, head of the Korea Development Institute.

Still, questions have been raised on whether corporate restructuring will be implemented in a prompt and surgical manner to minimize negative side effects and put the economy on the path to robust long-term growth.

Some experts are worried that active involvement of opposition parties might eventually result in holding back restructuring work.

Kim Chong-in, interim leader of the main opposition The Minjoo Party of Korea, said last week his party would consider cooperating in carrying forward the government-initiated restructuring on condition it is preceded by a full range of measures to cope with possible massive layoffs in the process.

Policymakers may fall short of meeting this demand. Then the opposition party may step back rather than playing a part in dealing with labor backlashes. Otherwise, it would take too much in terms of cost and time to work out an effective and timely plan for corporate restructuring.

The opposition party’s professed cooperation with the government will be put to an early test in the imminent restructuring of shipping and shipbuilding companies, which is set to shed thousands of jobs.

What will also be tested down the road is the sincerity of remarks made by the leader of the splinter opposition People’s Party in support for sweeping restructuring.

Business circles appear skeptical that corporate restructuring would be only good for the country’s economy.

“Unlike the foreign exchange crisis in the past, troubles faced by local manufacturing companies now stem mainly from global supply glut,” said Lee Seung-cheol, vice chairman of the Federation of Korean Industries, a main business lobby here.

Under this environment, he noted, Korea’s unilateral restructuring might only bring benefit to its competitors, including China.

While agreeing that corporate restructuring is urgently needed in some specified sectors, experts say creditor banks rather than policymakers and lawmakers need to be allowed to assume a leading role in deciding the fate of companies based on a more informed and objective position.

By Kim Kyung-ho (khkim@heraldcorp.com)