Threatening Factors: Higher Interest Rates, Stronger Won to Make Korean Companies Struggle | BusinessKorea

Monday, January 22, 2018

Seoul, Korea
8 November 2017 - 10:15am
Jung Suk-yee

As the interest rate on corporate bonds and commercial papers (CPs) has been on the rise and the Korean won has gotten stronger from October, domestic companies were put on alert. 

According to investment banking industry sources on November 7, the won-dollar exchange rate closed at 1,111.9 won on the same day, breaking the previous low of the year of 1,112.8 won. Accordingly, there are growing concerns that it will adversely affect business showings of not only companies that export products but also ones that win global orders. In particular, enterprises in the automobile, shipbuilding and heavy industry sectors, which currently have unfavorable market conditions, are expected to have more and more trouble getting capital. 

The interest rate on the 91-day certificates of deposit (CDs), which reached a record low of the year, increased 2 basis points last month to 1.4 percent a year due to the possibility of base interest rate rises. The CD is used as the benchmark rate for mortgage and business loans. 

The interest rate on the 91-day CPs, which are the short-term financing means of businesses, also rebounded at the end of last month. The CP interest rates have been rising by 1 basis point every day from the beginning of this month to reach 1.65 percent a year on the 7th. The interest rate on corporate bonds has been on the increase, reaching a new record high, while that on short-term products are climbing in earnest this month. 

Hong Joon-pyo, a senior analyst at Hyundai Research Institute, said, “The stronger won can make companies that should gain shipbuilding and heavy industry orders struggle further. It will also adversely affect domestic automakers that mainly export products.” 

When the CD interest rates increase, companies will have a higher burden of bank loan interests. Considering the fact that firms with low credit scores, which failed to get a bank loan, sought to raise capital from the market through corporate bonds and CPs, there are concerns that businesses with low credit scores will have more refunding risks.

 

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