Financial cost of corporations soars

Korean corporations saw their financial costs increased substantially from the pre-crisis level. In particular, large corporations reduced their debt through asset revaluation or capital increase and their assets are relatively large compared to their sales volume. So, it is believed that their current status doesn`t correspond with the noble intention of corporate restructuring.

The Bank of Korea announced the changes in financial cost burden of Korean manufacturing industries on July 13, saying that the ratio of financial cost in Korean companies stood at 6.9% in 1999, which is higher than the average of 5.8% between 1990 and 1997.

The debt ratio sharply reduced to 214.7% in 1999 from 396.3% in 1997, but the financial cost ratio of local companies increased substantially because they lowered the debt ratio simply through capital increase or asset revaluation, rather than repayment of debt. In fact, their reliance on borrowed funds declined slightly from 54.2% in 1997 to 42.8% last year.

Small and medium enterprises saw their financial cost ratio slide from 4.5% between 1990 and 1997 to 3.9% in 1999. On ther other hand, that of large corporations rose from 6.3% during 1990-1997 to 8.5% in 1999.

Chung Jung-Ho, director-general for economic statistics of the Bank of Korea, pointed out that corporations expanded their own capital by offering new issues in the process of restructuring after the foreign exchange crisis. However, he noted, they didn`t chop their debt substantially and to shut down unprofitable buisnesses, thus failing in corporate restructuring for an efficient operation of assets.