Korea Inc.’s cost of debt could rise by $6 billion due to rapidly rising interest rates

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[Photo by Park Hyung-ki]

The cost of debt would increase by $6 billion for Korean companies due to rapid increases in interest rates, which could affect their investments and hiring.

According to a joint study by Maeil Business Newspaper and the Korea Economic Research Institute on Wednesday.

The increase in the cost of borrowing was calculated by multiplying 1,544.7 trillion won of the outstanding balance of business loans extended by banks and non-bank financial institutions in April 2022 by an estimated increase of 0.52 basis points. percentage of interest on business loans following the rise in rates.

A higher interest charge would eat into the bottom line.

The net profit margin of non-financial corporations is expected to fall to 2.6% from 2.8% when the 50 basis point rise is reflected. That of manufacturers is expected to fall to 3.4% from 3.5% and that of non-manufacturers to 2.1% from 2.2%. The study is based on revenue and profit margin data from 799,399 non-financial companies with available tax returns.

Rapidly rising interest rates could hamper the ambitious investment plans of major Korean companies, rushed following the establishment of a business-friendly government.

The Bank of Korea estimated that investment in facilities, which rose 8.8% year-on-year last year, could fall 1.5% this year. It predicts a gain of 2.1% in 2023.

Korean companies are increasingly under pressure due to soaring raw material costs and the high value of the US dollar, while financing facilities have deteriorated sharply in the face of weak stock and bond markets.

The bank lending rate for plant investment hit 3.49% in April, the highest since 3.51% in March 2019.

The government is considering reducing the top corporate tax rate to 22% from the current 25% to help ease

charges for businesses.

According to an estimate by the Korea Institute of Economic Research, a 3 percentage point reduction in the top corporate tax rate can encourage an 11.9% increase in investment spending, worth $21.5 trillion. of won. It is estimated that the resumption of business activities due to the tax cut will lead to an increase in corporate tax of 18.9 trillion won and a drop in the unemployment rate of 1.67 percent, according to the study.

By Kim Jung-hwan and Cho Jeehyun

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]


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