The total bill for the corporate restructuring of South Korea’s troubled shipping and shipbuilding industries could reach 31 trillion won (U.S. $27 billion), according to a report released over the weekend by the International Monetary Fund (IMF).
By comparison, Seoul sent a 12 trillion won support package for the state-owned Korea Development Bank (KDB) and Export-Import Bank of Korea (KEXIM), which have a combined 10 trillion won in internal loss-absorption capacity.
In the report, “Benefits and Costs of Corporate Debt Restructuring: An Estimation for Korea
,” the IMF said the employment impact of bankruptcies and bailouts in the shipping sector will total around 10,000 workers.
This baseline estimate suggests a timeline for recovery of about 10 years, according to the fund.
“The economic cost of debt restructuring is not directly a fiscal cost, but may imply the need for fiscal support to incentivize corporate restructuring; to compensate individuals that might be affected by the employment impact of corporate restructuring (e.g. by providing unemployment benefits and retraining); to maintain the solvency and viability of banks that may recognize losses; and to offset the short-term drag on economic activity from lower output and consumption,” the IMF said. “Higher fiscal revenue associated with accelerated medium-term output growth and hiring post-restructuring may help offset the short-term fiscal costs."
The reported added that, “Overall, the key qualitative insight is that corporate debt restructurings ‘pay off.' The quantitative results hinge on a set of assumptions and estimates that, although being reasonable first approximations, can be refined to better reflect country-specific and industry circumstances.
“However, any refinement will still support the key qualitative result. When benefits and costs of debt restructuring are considered jointly, it becomes apparent that the economic costs of debt restructuring – both the cost to the creditors and the employment impact – are offset in the medium term by more rapid output growth and higher hiring.”
The IMF said Korea should serve as an “instructive case” for consideration of the costs and benefits of corporate restructuring.
“After years of rapid growth, many of Korean export-oriented industries face headwinds from a global economic slowdown. Shipping and shipbuilding are especially affected. Steel and petrochemicals may become distressed if the global slowdown deepens. The technology intensive industries, such as automobiles and electronics, are exposed to intensifying international competition," it said.
“Corporate debt vulnerabilities are high, and the government is taking steps to ‘to agree, and then swiftly implement, plans for the operational and financial restructuring of vulnerable firms, while ensuring an adequate social safety net to assist affected workers.’”
According to an analysis in the Korea Times
, Financial Supervisory Service data submitted to Rep. Chae Yi-bai of the minor opposition People's Party suggests the South Korean government has already poured 38.7 trillion won into the shipping and shipbuilding sector so far, including 20.8 trillion for 26 companies since 2008 alone. Primary creditor banks, however, have only been able to recover about 11 trillion won of the nearly 40 trillion invested in the beleaguered firms.
Rep. Chae reportedly said Seoul’s repeated bailouts of shipping companies have only exacerbated the issues faced by the industry, warning that the current restructuring must have a clear vision in order to affect real change.
“Most financial support came from state-run banks during the restructuring of shipbuilding and shipping companies, and misjudgments by policymakers only aggravated the problem,” the lawmaker said.