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By Umesh Desai
HONG KONG, Aug 13 (Reuters) - South Korea's smaller firms are struggling as credit tightens and the cost of servicing debt rises - a development that could put more strain on Asia's fourth-largest economy at a time of uneven global growth.
The government is trying to shore up faltering growth, with the new finance minister's stimulus package including funding for banks of up to 3 trillion won to expand lending and pressure for a cut in interest rates which the central bank is expected to deliver on Thursday.
Small- and medium-sized enterprises (SMEs), which account for around 90 percent of the corporate workforce and almost half of aggregate production, are struggling to raise funds amid a drying-up of the commercial paper market and reduced access to local bond markets following some defaults last year
"South Korean corporate profitability is pressured and debt service ratio is declining and the growth outlook is dim," said Raymond Yeung, Hong Kong based analyst with ANZ.
The premium charged for lending to lower rated corporate borrowers has risen sharply. The average corporate bond yield differential between companies rated BBB- and AAA has risen to 2-1/2 year highs of more than 600 basis points.
The funding crunch for SMEs is putting an additional strain on the export-reliant economy, dominated by chaebols - Korea's vastly diversified, international conglomerates known around the world for their smartphones, ships and cars.
The Bank of Korea (BOK) said the number of "marginal companies" - where cash generated from operations is less than interest costs for three straight years - had risen to 2965 at the end of 2012 from 2019 at the end of 2009, "undermining the engine for growth of the national economy".
However, analysts say monetary easing would have only limited benefits for the credit-strapped smaller firms.
"The pass-through from blunt tools like rate cuts or (reserve) adjustments is debatable for weaker credits at this stage, as there is already ample excess liquidity - unless there are a series of rate cuts there may not always be a meaningful pass through benefit for smaller borrowers," Barclays analyst Waiho Leong said.
"The one thing the BOK could do more is to continue to expand lending facilities, via soft loans to banks which can be used to lend to SMEs. It's measures like that which are more effective in cheapening credit costs for SMEs."
That could provide some relief to companies such as Dongbu Steel which has 90 percent of its debt coming due in two years time, and Tongyang Inc, all of whose debt is due by end-2015.
Tongyang Group sold its securities arm to raise money for debt repayment, while Dongbu Steel is grappling with a stalled restructuring plan after industry giant POSCO dropped its bid for its Incheon steel unit and Dangjin power plant.
"The economy is driven by chaebols and large corporations which are dependent on exports but as domestic demand slows the SMEs are struggling," said Citigroup's economist Jaechul Chang.
The economy grew at its slowest pace in more than a year in the second quarter as an uneven global recovery dented shipments and domestic consumption lagged.
The gloomy outlook has already prompted Finance Minister Choi Kyung-hwan to deliver an $11-billion stimulus package and other measures to prop up the wobbly economy.
Choi has also warned that Korea risks slipping into Japan-style stagnation, while overt pressure for monetary easing has seen the Bank of Korea row back on its hawkish stance with analysts widely predicting a rate cut on Thursday.
An executive at a small education software and equipment producer in Goyang, north of Seoul, said a rate cut this week would help ease the debt service burden on small companies, but added that it's only a partial solution.
"More efforts should be made to help ease the overall financing environment for smaller companies," said the official, who declined to be identified.
Citigroup's Chang said policy makers need to address structural issues such as an over-reliance on manufacturing and exports at the expense of consumption and services, a rapidly ageing population, and high household debt.
"The growth of chaebols and SMEs is lopsided," Chang said.
Additional reporting by Kahyun Yang; Editing by John Mair & Shri Navaratnam