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By Umesh Desai
HONG KONG Aug 13 South Korea's smaller firms
are struggling as credit tightens and the cost of servicing debt
rises - a development that could put more strain on Asia's
fourth-largest economy at a time of uneven global growth.
The government is trying to shore up faltering growth, with
the new finance minister's stimulus package including funding
for banks of up to 3 trillion won to expand lending and pressure
for a cut in interest rates which the central bank is expected
to deliver on Thursday.
Small- and medium-sized enterprises (SMEs), which account
for around 90 percent of the corporate workforce and almost half
of aggregate production, are struggling to raise funds amid a
drying-up of the commercial paper market and reduced access to
local bond markets following some defaults last year
"South Korean corporate profitability is pressured and debt
service ratio is declining and the growth outlook is dim," said
Raymond Yeung, Hong Kong based analyst with ANZ.
The premium charged for lending to lower rated corporate
borrowers has risen sharply. The average corporate bond yield
differential between companies rated BBB- and AAA has risen to
2-1/2 year highs of more than 600 basis points.
The funding crunch for SMEs is putting an additional strain
on the export-reliant economy, dominated by chaebols - Korea's
vastly diversified, international conglomerates known around the
world for their smartphones, ships and cars.
The Bank of Korea (BOK) said the number of "marginal
companies" - where cash generated from operations is less than
interest costs for three straight years - had risen to 2965 at
the end of 2012 from 2019 at the end of 2009, "undermining the
engine for growth of the national economy".
However, analysts say monetary easing would have only
limited benefits for the credit-strapped smaller firms.
"The pass-through from blunt tools like rate cuts or
(reserve) adjustments is debatable for weaker credits at this
stage, as there is already ample excess liquidity - unless there
are a series of rate cuts there may not always be a meaningful
pass through benefit for smaller borrowers," Barclays analyst
Waiho Leong said.
"The one thing the BOK could do more is to continue to
expand lending facilities, via soft loans to banks which can be
used to lend to SMEs. It's measures like that which are more
effective in cheapening credit costs for SMEs."
That could provide some relief to companies such as Dongbu
Steel which has 90 percent of its debt coming due in
two years time, and Tongyang Inc, all of whose debt
is due by end-2015.
Tongyang Group sold its securities arm to raise money for
debt repayment, while Dongbu Steel is grappling with a stalled
restructuring plan after industry giant POSCO dropped its bid
for its Incheon steel unit and Dangjin power plant.
"The economy is driven by chaebols and large corporations
which are dependent on exports but as domestic demand slows the
SMEs are struggling," said Citigroup's economist Jaechul Chang.
The economy grew at its slowest pace in more than a year in
the second quarter as an uneven global recovery dented shipments
and domestic consumption lagged.
The gloomy outlook has already prompted Finance Minister
Choi Kyung-hwan to deliver an $11-billion stimulus package and
other measures to prop up the wobbly economy.
Choi has also warned that Korea risks slipping into
Japan-style stagnation, while overt pressure for monetary easing
has seen the Bank of Korea row back on its hawkish stance with
analysts widely predicting a rate cut on Thursday.
An executive at a small education software and equipment
producer in Goyang, north of Seoul, said a rate cut this week
would help ease the debt service burden on small companies, but
added that it's only a partial solution.
"More efforts should be made to help ease the overall
financing environment for smaller companies," said the official,
who declined to be identified.
Citigroup's Chang said policy makers need to address
structural issues such as an over-reliance on manufacturing and
exports at the expense of consumption and services, a rapidly
ageing population, and high household debt.
"The growth of chaebols and SMEs is lopsided," Chang said.
(Additional reporting by Kahyun Yang; Editing by John Mair &