The prolonged fallout from issues in real estate project financing (PF) has left the construction sector's corporate sentiment struggling to recover. With the Bank of Korea likely to raise its benchmark interest rate this month, concerns are growing that funding pressures for the construction and real estate sectors may intensify.
According to the Bank of Korea's economic statistics system on July 13, the non-manufacturing corporate sentiment index (CBSI) fell to 95.4 last month, a decrease of 2.1 points from the previous month. In contrast, the manufacturing CBSI recorded 101.2, exceeding the neutral benchmark of 100.
The CBSI is a sentiment indicator derived from key metrics of the business survey index (BSI), where a score above the long-term average of 100 (2003-2024) indicates optimistic sentiment, while a score below reflects pessimism.
Among non-manufacturing sectors, the construction industry's struggles are particularly pronounced. The construction performance CBSI, which dropped to 43 in February last year before showing some recovery, remained at 52 last month, significantly below the long-term average. The real estate sector, closely linked to construction, also continued to show weakness with a score of 69.
The ongoing slump in the construction market is attributed to a combination of high interest rates, a tightening real estate PF market, and soaring construction costs since 2022. Increased funding costs, coupled with a sluggish housing market and reduced demand, have led to declines in both construction starts and investments.
The instability in the PF market is seen as a key factor hindering recovery in the construction sector. When initial funding for projects is blocked, it leads to construction delays, increased unsold inventory, and declining profitability.
In fact, the slowdown in the construction market is impacting related industries as well. This year, the cement industry plans to invest 429.7 billion won, a decrease of about 10% from last year and down 13.9% compared to the average over the past five years.
A significant concern is that the construction sector's struggles are also increasing pressures on the financial sector's stability. According to the Bank of Korea's financial stability report, the delinquency rate in the construction sector rose to 5.48% in the first quarter of this year, influenced by the realization of contingent liabilities from real estate PF failures. The delinquency rate in the real estate sector also reached 3.01%.
The debt-to-equity ratios for both the construction and real estate sectors peaked between 2022 and 2023, and a gradual deleveraging process is underway. However, as the construction slump continues, the interest coverage ratio has not shown significant improvement, indicating that profitability and debt repayment capabilities remain weak.
With the Bank of Korea likely to raise interest rates this month, the burden on the construction industry is expected to increase further. Rising rates could elevate PF loan costs and corporate borrowing expenses, further deteriorating the debt repayment ability and profitability of construction firms.
Kim Hyun-tae, a researcher at the Korea Financial Research Institute, stated, "As the construction market continues to slump, the proportion of marginal firms in both the construction and real estate sectors is increasing. The vulnerabilities in terms of interest payment capacity and profitability remain, making it difficult to conclude that the overall risk of insolvency in the sector has been adequately addressed."
He added, "Given the likelihood of continued construction market weakness even in a rising interest rate environment, it is essential to provide short-term liquidity support while also pursuing long-term improvements in financial structures, along with strengthening selective credit supply systems based on individual firms' performance and debt repayment capabilities."
* This article has been translated by AI.
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