[Why&Next] Overseas Construction Alarm Amid PF Crisis... 'One Team Korea' Remains Quiet

Construction Companies' Credit Ratings 'Negative'
Concerns Over Small Firms' Inability to Secure Contracts
Withdrawing from Bidding to Play It Safe

As concerns over the insolvency of real estate project financing (PF) intensify amid the construction industry's downturn, alarm bells have been triggered for overseas construction orders. Starting with Taeyoung Construction's workout, the growing fears of a domino effect of insolvencies in the construction sector are being analyzed as a major obstacle to targeting the overseas construction market. With the government-led overseas construction order support group 'One Team Korea' remaining quiet, there are also predictions that achieving $30 billion in orders for the fifth consecutive year this year may be difficult.

"Decline in Construction Companies' Credit Ratings, Risks in New Overseas Orders"

Photo by Pixabay

According to the financial sector on the 17th, Korea Ratings downgraded GS Construction's unsecured bonds (A+) and commercial paper (A2+) to A and A2, respectively, at the end of last month. Dongbu Construction's commercial paper and electronic short-term bond ratings were also lowered from A3+ to A3. Korea Credit Rating is reportedly evaluating the long-term credit rating outlooks of GS Construction (A+), Lotte Construction (A+), HDC Hyundai Development Company (A), and Shinsegae Construction (A) as 'negative.'

A representative from a construction company said, "The credit ratings have not fallen to a level that causes immediate concern, but internally we are monitoring the trend." He added, "Just as credit ratings are important for domestic financing capabilities, they are equally important for overseas construction orders. Competitor construction companies sometimes use this as a pretext to engage in obstruction." It is an industry consensus that during the 2008 global financial crisis, construction companies that joined the financial sector's construction industry recovery program, the 'PF Lenders' Council,' experienced credit rating declines, which raised concerns among overseas clients.

Especially for small and medium-sized construction companies, it is difficult to obtain guarantees based on credit evaluations for overseas construction orders, and if credit ratings fall, winning orders can become practically impossible. A representative from B Construction, which previously underwent a workout, said, "Although there are differences in methods between workouts and court receiverships, overseas clients view them the same way." He added, "If credit ratings fall because of this, even if existing orders are somehow maintained, new orders inevitably face restrictions."

Construction companies are also being cautious. Recently, Samsung C&T, Hyundai Engineering & Construction, and Daewoo Engineering & Construction did not participate in the bidding for the 'Jeddah Tower' project, the world's tallest building planned by Saudi Arabia in the resort city of Jeddah. The Jeddah Tower will have 168 floors above ground and will be the first in the world to exceed 1 km in height, reaching 1,008 meters. The estimated construction cost is $1.23 billion (approximately 1.65 trillion KRW). Domestic construction companies, which have proven their competitiveness in constructing supertall buildings mainly in the Middle East and Southeast Asia, declined the symbolic 'tallest building' project, which is seen as prioritizing risk management.

A representative from C Construction said, "Since construction was halted in 2017, the Jeddah Tower has had a long gap period, so the risk burden is high." He added, "Given the nature of Middle Eastern projects, investment funds need to be raised, but the current situation of intensified real estate PF risks is not suitable."

$40 Billion Order Target This Year... "Putting Out Domestic Fires First"

'2024 Construction Industry New Year's Meeting' scene / Photo by Korea Construction Association

The government also seems to be focusing on putting out urgent domestic fires ahead of the general elections in April. This is a stark contrast to last year when the Ministry of Land, Infrastructure and Transport led One Team Korea to visit three Middle Eastern countries from the beginning of the year. A government official said, "So far, there have been no reports or scheduled overseas activities for One Team Korea."

One Team Korea started its overseas visits last year from January 24 to 26, visiting Saudi Arabia, Iraq, and Qatar, followed by Indonesia in March, and President Yoon Suk-yeol personally visited the Middle East in October. As a result of these extensive visits, overseas construction orders reached $33.31 billion last year, an increase of about 7.5% compared to the previous year.

The government has set this year's overseas construction order target at $40 billion. Interest is reportedly high not only in Saudi Arabia's NEOM project but also in Ukraine's reconstruction and Iraq. Construction companies, facing a sluggish domestic economy, cannot afford to loosen their grip on overseas construction orders. However, many overseas projects require initial funding, and the risk from Taeyoung Construction's workout has not yet been extinguished, so concerns cannot be completely dismissed.

A representative from D Construction said, "Some believe that the issue of construction company workouts may resurface after the general elections," emphasizing, "It is most important that it does not spread further." He added, "It is not easy for domestic construction companies to compete individually with Chinese companies that have strong financial power. That is why One Team Korea is necessary," and stressed, "Continuous government support is needed."