Marginal companies, or zombie firms, that cannot even cover their loan interest with operating profit have been found to obstruct funding for healthy companies as well. According to Toss Insight's "Productive Credit Allocation" report released Wednesday, every 10 percentage-point increase in marginal firms' debt share raised the average borrowing rate of healthy companies in the same industry by 0.10 percentage point. In addition, when zombie firms' debt share rose by 1 percentage point, the borrowing rate of healthy companies in the bottom 25% of credit ratings increased by an average of 0.017 percentage point more. This is evidence that failing to weed out marginal companies in time can trap even viable companies in a vicious cycle in which insolvency spreads.
The Bank of Korea (BOK) also pointed out that the survival of zombie firms erodes productivity and growth rates. The BOK Economic Research Institute said the same day that when the share of marginal companies within an industry rises by 1 percentage point, the investment and employment growth rates of healthy companies fall by 0.14 to 0.18 percentage point. This is the result of limited financial resources being tied up in insolvent companies and failing to flow properly to highly productive companies. The BOK estimated that even if just 25% of marginal companies were appropriately removed, overall economic productivity would rise by 0.2% and value added by 0.35%.
To change the constitution of an economy where low growth is becoming entrenched, the restructuring of zombie firms must be expedited. Last year, the share of domestic marginal companies stood at 28.2%, the highest on record since 2013. This is because companies have failed to improve their fundamentals amid high interest rates, entrenched low growth, and a rapidly changing industrial structure. The harm caused by zombie firms is also laid bare in the stock market. While the KOSPI is eyeing the 9,000 level, many point out that the reason the KOSDAQ is treading water at the 1,000 level is also the numerous insolvent listed companies that have not been cleared in time.
However, the restructuring of zombie firms requires the wisdom to separate the wheat from the chaff. In the case of marginal companies that have fallen into temporary management difficulties, if their technological competitiveness and growth potential are clear, it is right to open opportunities for them to leap forward again through productive finance. But attaching a "financial ventilator" even to companies with slim chances of recovery is no different from eroding the industry's growth potential rather than protecting jobs. To enhance national productivity and restore trust in the capital market, the government and financial authorities must show not the slightest hesitation in clearing out marginal companies.
