IMF Warns of Korea's Spiraling Corporate Debt

The International Monetary Fund has warned about potential insolvencies as corporate debt grows in Korea amid soaring interest rates. 

The IMF in a recent report tallied the proportion in Asian countries of borrowings by companies from the third quarter of 2021 to the second quarter of 2022. 

In Korea's case, it pointed out that 22.1 percent of indebted businesses in Korea have an interest coverage ratio of less than one. A ratio of three is considered sound, but anything less than that is dicey.  

That ranks Korea fifth out of 12 Asian countries after India (31.1 percent), Thailand (28 percent), China (25.8 percent) and Indonesia (22.7 percent).

The proportion was smaller in Vietnam (18.3 percent), Japan (15.8 percent), Malaysia (13.3 percent), Hong Kong (7.8 percent), Singapore (6.6 percent), Australia (6.3 percent) and the Philippines (3.3 percent).

The interest coverage ratio measures a company's ability to honor its debt payments and is calculated by dividing earnings by their total interest commitments. A ratio of one suggests they are perilously close to defaulting if revenues take a hit.

"Asia's increased borrowing in recent decades has augmented the region's exposure to rising interest rates and heightened market volatility," the IMF warned. "Across the region, a common theme is that a significant share of firms in the property and construction sector have interest coverage ratios close to or below one." 

According to a global debt report by the Institute of International Finance on Monday, Korea's corporate debt stood at way over 100 percent of GDP at 118.4 percent in the first quarter this year.

That is dangerously high and places Korea fifth out of 34 countries following Hong Kong's astronomical 269 percent, China's 163.7 percent, Singapore's 126 percent and Japan's 118.7 percent. The eurozone was tallied as one region.