S. Korean firms see Q1 profitability dip, suffer higher debt

By Kim Soo-yeon
SEOUL, June 1 (Yonhap) -- South Korean companies' profitability worsened in the
first quarter amid slumping sales and increased foreign exchange losses with
their debt level hitting a six-year high, the central bank said Monday.

The ratio of local companies' pre-tax net income to sales, a key barometer of
profitability, reached 2.3 percent in the January-March period, sharply down from
6.7 percent a year earlier, the Bank of Korea (BOK) said in a report based on a
survey of 1,534 companies.
"Korean firms' profitability deteriorated last quarter from a year earlier amid
sluggish sales, while the won's weakness increased import costs and resulted in
foreign exchange losses," Park Jin-wook, head of the BOK's corporate statistics
team, told reporters.
"But compared with the previous quarter, local companies' profitability improved
as the effect of falling oil prices outweighed a weaker won."
Local firms' sales declined 0.6 percent in the first quarter as the global
economic downturn sapped demand for Korean products, eclipsing the positive
effects of a weaker won on exports. The figure marked the first decline since the
third quarter of 2003 when sales shed 6.3 percent, the BOK added.
The Korean currency tumbled 32.5 percent against the U.S. dollar in the first
quarter, compared with the previous year. A weaker won raised the value of
foreign exchange losses and debts when they were converted into the Korean unit.
Local firms saw their financial soundness dented due to their efforts to expand
financing to prepare for rainy days.
The companies' average ratio of debt to equity reached 116.2 percent as of the
end of March, up from 108.3 percent from three months earlier, as local firms
sold more debts and borrowed to brace for a possible liquidity shortage. The
figure was the highest since the first quarter of 2003 when it reached 129
percent, the BOK said.
"Although the BOK aggressively has cut the key rate, the yields on corporate
bonds still stayed higher in the first quarter from the previous year, raising
local firms' financing costs," Park said.
The data comes as the South Korean economy narrowly averted a recession, or two
straight quarters of contraction, in the first quarter by growing 0.1 percent
from three months earlier. Asia's fourth-largest economy shrank 5.1 percent in
the last quarter of 2008.
The BOK predicted that the local economy will contract 2.4 percent this year, the
worst performance in 11 years, due to falling exports and sluggish domestic
demand. It slashed the rate in six steps totaling 3.25 percentage points to an
all-time low of 2 percent between October and February.
sooyeon@yna.co.kr
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