[Financial Stability Report] U.S. Tariffs to Weaken Interest Coverage in Auto and Petrochemical Sectors

Interest Coverage Ratio Estimated Based on Recent Export Trends and Corporate Performance
Financial Soundness of Automobiles, Machinery and Equipment, Metal Products, and Petrochemicals 'Vulnerable'
Current Ratios for Petrochemicals, Transportation Equipment, and Electronics Also Drop to 'Risk' Levels

It has been analyzed that the interest coverage and liquidity response capabilities of four major South Korean industries-automobiles, petrochemicals, machinery and equipment, and metal products-will deteriorate due to the impact of U.S.-imposed tariff increases. In particular, the petrochemical sector is projected to see its interest coverage turn negative by the end of this year. The current ratio, which indicates short-term liquidity, has already dropped to just above the critical level of 100%.

A view of a domestic petrochemical plant.

According to the Bank of Korea’s Financial Stability Report released on December 23, the section titled “The Impact of U.S. Tariff Policy on Corporate Financial Soundness” estimates that, among major export industries, the interest coverage ratio (operating profit/total interest expenses) for automobiles, machinery and equipment, metal products, and petrochemicals will decline by the end of this year compared to the end of last year. This projection is based on recent export trends and estimated changes in corporate performance.

Automobiles and machinery and equipment, which have a relatively high proportion of exports to the U.S., are expected to be significantly affected by the decrease in exports to the U.S. For metal products and petrochemicals, the main reasons for the decline in interest coverage are poor export performance due to structural issues such as global oversupply. Notably, the petrochemical sector is expected to see its interest coverage ratio turn negative. The interest coverage ratio is an indicator of a company’s ability to service its debt. If the ratio falls below 1, it means that operating profit is insufficient to cover interest expenses.

The report pointed out that, among major export industries, the liquidity response capabilities of petrochemicals, transportation equipment, and electronics had already weakened by the end of the second quarter of this year, even before the full impact of tariff shocks. The current ratio for petrochemicals fell from 133.1% in the second quarter of 2021 to 103.2% in the second quarter of this year. During the same period, the electronics sector dropped from 137.5% to 107%. The transportation equipment sector fell from 108.5% to 95.5%, dropping below the 100% threshold. The current ratio is an indicator of a company’s short-term payment capability. Typically, a ratio of 150-200% is considered stable, while a ratio below 100% signals liquidity risk.

The ratio of cash and cash equivalents also declined across all sectors. The transportation equipment sector saw the largest drop, from 14.9% to 9.1%, a decrease of 5.8 percentage points. As of the second quarter of this year, the electronics sector had the lowest ratio at 5.2%. The petrochemical sector also showed a low ratio at 6.6%. In terms of borrowing structure, the proportion of short-term borrowings increased significantly in metal products (from 41.4% to 56.4%) and petrochemicals (from 35.8% to 51.9%), indicating growing vulnerabilities in funding structures.

Lee Junseok, Head of the Stability Analysis Team at the Bank of Korea’s Financial Stability Department and author of the report, stated, “If the decline in corporate financial soundness due to tariff imposition becomes more pronounced, it could negatively impact the asset quality of financial institutions. However, the likelihood of this risk spreading to the entire financial system remains limited.” He added, “If credit risk in certain export industries becomes more prominent, companies may face difficulties raising funds through corporate bonds and refinancing, which could expand credit risk into liquidity risk.”

There are particular concerns that some sectors, such as metal products and petrochemicals, already have weakened capacity to respond, not only due to U.S. tariff policy but also because of structural issues, warranting close monitoring. Lee emphasized, “Companies need to diversify supply chains and strengthen competitiveness, while financial institutions should focus on credit risk management and ensure stable credit supply. Policymakers should prepare measures to minimize damage to export companies, but also actively pursue restructuring for companies with low prospects of recovery.”