NABO Economic Trends & Issue (Issue No. 25)

This report addresses “the worsening of corporate profitability and the corporate tax landscape” as well as “recent economic trends.”

  Despite the economic recovery both at home and abroad, it seems it will be some time before the environment for corporate tax collection improves. This is because collection of corporate tax is affected by corporate profitability and the pace at which corporate profitability improves is expected to be slower than that of the general economic recovery. The reason for this is four-fold: First, despite an improved trade environment, a low exchange rate (a strong Won), weakened price competitiveness in trade with Japan brought on by a weak Yen, and an upper limit on export price increases (due to heated competition with China) have all combined to create a gradual increase in export revenues. Second, domestic revenue recovery is expected to be slower than export revenue recovery because of a slow improvement in the income environment due to a delay in employment creation, an added burden on households to repay their loans and interest, a crimped real estate market and an aging population. Third, price structures are worsening due to an increase in unit labor costs and financing costs (resulting from a rise in debt ratio and a widening of credit spread among corporations with low credit ratings) and a delay in structural reforms. Fourth, liquidity risks in some conglomerates with undermined profitability and competitiveness makes it difficult to improve their financial structure (characterized by a sustained period of high debt and low profitability).

  It has also been reported that corporate profitability and financial health have worsened again due to a sluggish domestic economy and a delay in structural reforms. In particular, the default risk of larger corporations (i.e., corporations and industries that are struggling due to a weakened competitiveness in its overseas markets and slow demand in domestic markets) seem to have grown even further. Domestic banks have also tightened their policies for lending money to conglomerates since the third quarter of 2013, which means that conglomerates which are already in a financially tricky position will face even further difficulty in securing additional financing. The liquidity risks of conglomerates have been reflected onto an ever growing credit spread between commercial papers of healthy companies and unhealthy companies since the end of 2012. Unhealthy companies have stopped issuing commercial papers as investors’ interest in junk bonds has cooled as well. Some subsidiaries of major conglomerates have recently started taking steps to turn things around. This is because a depressed construction market, as well as sluggish shipbuilding and shipping industries have led to prolonged periods of increasingly low profitability, while the conglomerates’ delaying of restructuring and taking on new debt have only led to a liquidity crisis. Although the economy both at home and abroad is expected to slowly pick up from 2014 onwards, the default risk in some conglomerates decreases the likelihood that either corporate profitability or the environment for corporate tax collection will improve anytime soon.