Trade War and Profit Decline... Last Year's Corporate Net Fundraising Hits 73 Trillion Won, Highest in 8 Years

Bank of Korea '2019 Interim Financial Flow (Provisional)'

[Asia Economy Reporter Kim Eun-byeol] Last year, companies struggling due to the trade war and semiconductor industry downturn raised insufficient funds through debt. Household disposable funds increased significantly due to the government's real estate stabilization measures. Investment was replaced by disposable funds as household loan regulations tightened.

According to the "2019 Mid-Year Financial Flow (Provisional)" released by the Bank of Korea on the 8th, the net fund operation scale of the domestic sector resulting from economic activities in Korea last year was 64.2 trillion won, down from 79.3 trillion won the previous year.

Net fund operation refers to the amount obtained by subtracting financial institution loans (fund procurement) from money managed by households in deposits, bonds, insurance, and pension reserves (fund operation), representing disposable funds. If the difference is negative, it is called net fund procurement.

By economic sector, the net fund operation and procurement difference of households and non-profit organizations increased compared to the previous year (52.7 trillion won → 91.8 trillion won), while that of non-financial corporations (-44.4 trillion won → -72.9 trillion won) and general government (55.0 trillion won → 38.3 trillion won) decreased.

In the case of households and non-profit organizations, net fund operation expanded, which the Bank of Korea explained was due to a decrease in new housing investment. Residential building construction investment fell from 114.2 trillion won in 2018 to 102.4 trillion won last year. Nationwide apartment move-in volumes also decreased from 458,000 units to 440,000 units during the same period. As housing demand declined, disposable funds increased.

Examining changes in household fund operation by financial asset type, net acquisition of financial institution deposits was 123.6 trillion won, an increase of 51.6 trillion won compared to 72 trillion won the previous year. Net acquisition of insurance and pension reserves (69.8 trillion won) increased by 8.4 trillion won year-on-year. Conversely, bonds, equity securities, and investment funds decreased by 17.6 trillion won and 25.6 trillion won respectively. Despite the low-interest-rate environment, household funds flowed into safe deposits.

For non-financial corporations, net fund procurement expanded compared to the previous year as listed companies’ net income sharply declined from 82.3 trillion won to 38.7 trillion won. Net fund procurement surged from 44.4 trillion won to 72.9 trillion won. This is the largest net fund procurement scale in eight years since 2011 (74.6 trillion won).

Generally, households supply funds to other sectors through deposits, making them net fund operators (operation > procurement), while companies use funds supplied by households and others, thus being in a net fund procurement state (operation < procurement).

The general government’s net fund operation scale shrank to 38.3 trillion won last year from 55 trillion won the previous year due to increased expenditures compared to revenue.

The Ministry of Economy and Finance announced that last year’s consolidated fiscal balance (total revenue - total expenditure) was a deficit of 12 trillion won, worsening by 4.32 trillion won compared to the previous year. The deficit was the largest in 10 years since 2009 (-17.6 trillion won, 1.5% of GDP), when the global financial crisis was at its peak.

Meanwhile, at the end of last year, the net financial assets (financial assets - financial liabilities) of the domestic non-financial sector amounted to 2,867.8 trillion won, an increase of 239.9 trillion won from a year earlier. Including foreign sector financial assets, the total financial assets of all economic sectors stood at 1,858.05 trillion won at the end of last year, up 1,422.5 trillion won from the previous year.