S&P affirms South Korea ‘AA/A-1+’ ratings with stable outlook

SINGAPORE: S&P Global Ratings affirmed its ‘AA/A-1+’ long- and short-term foreign and local currency sovereign credit ratings on Korea.

The outlook is stable, which reflects expectation that geopolitical risks in the Korean peninsula will not escalate to the point of hurting Korea’s economic fundamentals over the next two years. Beyond the outlook horizon, Korea’s economic growth rate could decline toward the average level among its rating peers, as the country becomes wealthier and its labor force ages.

“We expect broad continuity in economic policies over the coming two years. We may raise the sovereign ratings if the security risks and contingent liability risks posed by North Korea recede. We would lower the ratings if geopolitical tensions related to North Korea intensify to a point that they negatively affect Korea’s economic, fiscal, or external performance,” S&P noted in a press release.

Ratings on Korea reflect the country’s favorable policy environment, sound fiscal position, ample monetary flexibility, and solid net external creditor position. “We believe Korea’s high-income economy continues to demonstrate stronger growth prospects than most developed countries. External security risks and contingent liabilities partly offset these strengths”.

S&P expects Korea to maintain fiscal surpluses in the near term, albeit at lower levels as the administration pursues expansionary policy to boost social benefits and create jobs.

The credibility of the central bank supports monetary policy flexibility, and risks from high household debt have moderated.

Korea’s strong external metrics are an anchor for the sovereign rating. The country enjoys a favorable net international investment position, and a long record of external surpluses. The domestic banking sector turned into a net external creditor in 2014, from having net external debt of 25% of current account receipts (CAR) in 2009.

The average maturity of the banking sector’s gross external debt has also lengthened, and the share of Korea’s total short-term external debt in the CAR has decreased. We project that the external liquid assets of the government and financial system will exceed total external debt by about 49% of CAR at the end of 2019, up from an estimated 20% five years ago.

“We believe the depth of the Korean won in the foreign exchange market, coupled with a floating exchange rate, affords the Korean economy with a strong external buffer. The won is an actively traded currency, by our definition. Korea also runs consistent and wide current account surpluses. We project its current account surplus will average about 2.9% of GDP over the next three years”.

Korea’s monetary policy regime supports resilient and sustainable economic growth. The Bank of Korea’s (the central bank) inflation targeting policy, which has been in place since the Asian financial crisis two decades ago, has been largely successful in maintaining a stable economy while managing inflationary expectations. This has supported the credibility of the central bank’s monetary policy independence. Market interest rates have typically moved in line with policy rate adjustments.

“Nevertheless, we believe Korea’s high household debt could constrain monetary flexibility. The authorities’ efforts over the last few years to convert variable-rate and bullet-payment mortgages to fixed rates and amortizing home loans has alleviated some of the risks emanating from the household sector. The adoption of a debt-service ratio by the banking sector should help slow down the pace of growth in household debt in 2019”.

The Korean government’s healthy fiscal position offers further support for the sovereign’s creditworthiness. Including the fund balance for social security, Korea has reported general government surpluses in most years since 2000. However, the central government annually issues modest amounts of debt that is purchased by the country’s defined-benefit pension fund. Korea’s net general government debt, calculated using our estimations of liquid assets held by the pension funds and government deposits, is a modest 6.4% of GDP in 2018.

S&P believes the size of fiscal surpluses will gradually decline over President Moon’s term. With the Moon administration’s focus on enhancing social benefits and job creation, government spending will increase.


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