Credit downcycle

Government should not risk pulling down corporate ratings

Many leading Korean businesses are in danger of experiencing a downgrade in their credit ratings.

"After a robust performance in the three years to 2017, Korean companies are entering a credit downcycle ― albeit a moderate one," Park Junhong, a credit analyst at Standard & Poor's Global Ratings, said in a report Tuseday. "We expect the creditworthiness of Korean companies to remain under pressure over the next 12 months." S&P then attached a "negative tag" to 10 of Korea's 13 key companies.

The fall in corporate ratings is indeed a serious problem, as it adversely affents not just international credit standings but also capital financing and export contracts. Noteworthy is S&P's explanation that Korean companies' more aggressive financial policies and shareholder returns are the main reasons for the downware pressure on their creditworthiness. More specifically, it noted that competitive increases in dividend payouts and share buybacks have resulted in cash outflows, aggravating their financial structure and eroding corporate value.

The rise in corporate credit risks is due in part to the government's policies, incuding its wielding of the stewardship code ― which allows investors to engage in management decisions of the companies they have invested in ― through the state pension fund. As the National Pension Service has demanded high dividends and shareholder rights, and with activist hedge funds exerting pressure, domestic businesses have had few other choices but to come up with aggressive financial polices.

To sum up, the Moon Jaein administration is helping to weaken Korean businesses' already vulnerable governance structures by unilaterally siding with shareholders. It's regrettable that the government has worked to pull down domestic businesses' corporate value through unwarranted intervention in their management. So much so that the Institutional Shareholder Service has called for Korean companies to refrain from paying excessive dividends for future growth.

S&P said Korean businesses' operating efficiency and competitive preduct offerings are bolstering their credit worthiness. If the government continues to pull down their international credit standing instead of supporting their corporate activites, however, domestic enterprises will soon hit their limit. Now is the time for the government to create an investment-friendly atmosphere through deregulation, not to improperly interfere in business operations.