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S&P’s warnings

July 13,2019
In its latest report, global rating agency Standard & Poor’s (S&P) warned that the credit quality of Korea’s top 200 companies has weakened for the first time since 2014 as a result of rising debts and stalled earnings in 2018. The rating agency also warned against downside pressure on their credit status over the next 12 months. Among the risks were challenges to Korea’s economy from heightened trade tensions and aggressive government spending. It downgraded debt ratings for KCC and Hyundai Motor and lowered outlooks for SK Hynix, SK Telecom, Emart and LG Chem. S&P also lowered Korea’s growth estimate for this year to 2.0 percent from 2.4 percent.

S&P has turned gloomier on Korea Inc. because corporate performances have significantly worsened this year in the face of trade barriers from Japan on top of the Sino-U.S. trade war. The agency predicted the semiconductor, smartphone, automobile and petrochemicals industries, whose revenues mostly come from overseas markets, will have bumpy rides over the next one or two years. Top chipmakers Samsung Electronics and SK Hynix saw their operating profits in the first quarter shrivel by 60 percent and 69 percent, respectively, from a year ago. Korea’s other mainstay industries also have fared poorly.

S&P noted that Korean companies were weighed down by regulatory risks, citing the cases of Korea Electric Power Corp. and other utility and social infrastructure companies who cannot raise fees despite their worsening balance sheets because of government orders. The pressure to find new growth engines — such as expanding battery capacities for chemical companies like LG Chem and SK Innovation or conducting M&As as in the case of KCC and SK Telecom — have weakened their financial situations.

Korea Inc. is squeezed between external risks and a stubbornly weak domestic market. Companies fear doing business. The government maintains things will get better in the second half. Deputy Prime Minister for the Economy and Finance Minister Hong Nam-ki has been repeating that Japan’s export curbs on inputs for our chip and display factories — the pillar of Korean exports — will not hurt gross domestic product (GDP) growth.

But nothing is going well for the Korean economy. Overseas capital investment by Korean companies hit an all-time high in the first half, whereas foreigners’ direct investment in Korea plunged by a whopping 37.3 percent during the same period against a year-ago period. Korea has lost its appeal due to a dramatic jump in labor costs and anti-business policies. The government must shift its economic policy direction. It must create a business-friendly environment to attract investment at home and from abroad. It must do away with antimarket policies like its income-led growth policy and regulations. Policymakers responsible for the woes in our economy should be replaced.