"Can't Even Pay Interest with Operating Profit"… South Korea's Share of Zombie Firms Ranks 4th Among OECD Countries

[Asia Economy Reporter Suyeon Woo] The proportion of zombie firms in South Korea ranks fourth highest among OECD countries. One in five domestic companies has been a zombie firm, unable to cover interest expenses with operating profits for three consecutive years, and both the proportion and growth rate exceeded the OECD average.

On the 28th, the Federation of Korean Industries announced that, according to a survey on the proportion of zombie firms in OECD member countries, South Korea's zombie firm ratio stood at 18.9% last year, ranking 4th among 25 surveyed countries. Zombie firms refer to companies whose operating profits have been lower than interest expenses (interest coverage ratio below 1) for the past three years. The survey was limited to companies with total assets of 50 billion KRW or more.

The survey results showed that from 2018 to 2020, 19 out of every 100 domestic companies could not even cover their interest expenses with operating profits. Examining the trend over the past five years (2016?2020), the proportion of zombie firms in Korea slightly decreased from 15.7% in 2016 to 15.2% in 2017, then steadily increased to 18.9% in 2020.

Comparison of the Proportion of Zombie Companies in 25 OECD Member Countries / Source: Federation of Korean Industries

Looking at OECD countries, as of last year, South Korea's zombie firm ratio ranked 4th after Canada, the United States, and Greece. This figure is 5.5 percentage points higher than the OECD average of 13.4%, and is 7.6 times higher than Japan’s, which has the lowest proportion at 2.5%.

In particular, South Korea’s zombie firm ratio increased significantly after COVID-19. It rose by 2.8 percentage points from 16.8% in 2018 to 18.9% in 2020, exceeding the OECD average increase of 1.8 percentage points during the same period. Additionally, due to the impact of COVID-19, 19 out of the 25 surveyed countries saw an increase in their zombie firm ratios in 2020 compared to 2018.

Yoo Hwan-ik, head of the Corporate Policy Office at the Federation of Korean Industries, emphasized, "South Korea’s proportion of zombie firms is already very high within the OECD, and the rate of increase is also relatively fast. We need to create a business-friendly environment to help companies on the brink survive on their own."