Korean manufacturers' debt repayment ability hits 8-year low in 2008

SEOUL, July 23 (Yonhap) -- The ability of South Korean manufacturers to repay debt sank to an eight-year low in 2008 as a severe business slump sharply cut their cash receipts, the central bank said Thursday.

The ratio of a manufacturer's operating cash flow to short-term borrowing and
interest reached 51.4 percent in 2008, sharply down from 85 percent in 2007 and
the lowest since 49.2 percent in 2000, according to the Bank of Korea (BOK).
The ratio measures a company's ability to service short-term debt with cash
generated from operating activities.
"The cash flow of local manufacturers worsened last year as the slumping economy
cut their earnings and raised inventory," said Jo Phil-ho, an official at the
BOK. "Due to shrinking cash income, their borrowing from banks increased
sharply."
A local manufacturer recorded an average operating cash flow of 9.64 billion won
(US$7.71 million) last year, down 18.9 percent from the previous year and the
first annual decline since 2005 when it fell 18.4 percent, the BOK said.
Korean manufacturing companies posted a net cash inflow of 5.36 billion won on
average from financial activity in 2008, up from 2.35 billion won a year earlier,
due mainly to increased loans from banks.
Amid the tight cash flow and a slowing economy, manufacturers did not spend the
borrowed money on investments, but used it to increase their cash holdings to
brace for rainy days, it said.
"In the fourth quarter, it seemed that Korean manufacturers tried to increase
their cash reserves to brace for a liquidity squeeze," Jo added.
The data comes as Asia's fourth-largest economy fell 2.2 percent last year due to
faltering exports and sluggish domestic demand. The Korean economy tumbled 5.1
percent on-quarter in the fourth quarter in the aftermath of the global economic
recession.