Amid the recent downgrades to European sovereign credits, South Korea’s resilience to global headwinds is allowing Asia’s fourth biggest economy to defy the trend. Yesterday, Moody’s Investors Service upgraded the country’s government bond rating one notch to Aa3 from A1, with a stable outlook.
The agency justified its action by pointing to Korea’s strong fiscal position, its economic strength, a decline in its banking sector’s external vulnerability, and the fact that there has been no worsening of political tensions with North Korea. It now rates South Korea's sovereign risk the same as that of China and Japan.
“The government's balance sheet has been relatively unscathed by the global financial crisis and, so far, by the eurozone crisis,” said Moody’s in a statement.
Solid fiscal fundaments should provide room to manage future contingent domestic risks or external shocks. The budget quickly returned to surplus in 2010 after dipping into deficit in the previous year, and has stayed that way ever since. Korea’s gross financing requirement of 0.9% of GDP in 2012 is among the lowest for an industrialised country, according to the IMF.
The country’s total debt as a percentage of GDP is low and declining, said Moody’s, while access to funding in its large, domestic capital market is secure.
Protection against external shocks has been bolstered by an increase in foreign exchange reserves, which have remained above $300 billion since April 2011. They hit a record level of $314 billion in July 2012.
In addition, the Korean economy has avoided a recession, despite a worldwide slowdown in 2009, and bounced back strongly in 2010. Indeed, its trend growth is now higher than that of other advanced industrialised countries.
A slower growth rate this year should be mitigated by the competitiveness of Korea’s export sector, when the rest of the world recovers. The unemployment rate is just 3.1%, and productivity continues to increase.
The banking sector is also more robust than three years’ ago, as it has reduced its reliance on offshore wholesale market funding, while loan-to-deposit rates have generally declined to more prudent levels.
Finally, Moody’s rating action “is supported by a developing outlook which suggests that the geopolitical status quo will not be adversely disrupted by the ongoing leadership transition in Pyongyang”.
Yet, both Fitch and Standard and Poor’s remain more cautious, maintaining lower credit ratings of A+ and single-A respectively.
And Moody’s also identified some concerns. These include a protracted economic weakness in Europe hurting Korean exports, the extent of public corporation liabilities, and still rising household debt which might dampen consumption.
On the other hand, Moody’s pointed out that much of the new debt raised by state-owned firms has been allocated to the development of resources overseas and domestic energy infrastructure, which will generate future revenues.
As a result of the sovereign upgrade, Moody’s also assigned Aa3 foreign currency credit ratings to six Korean state-owned financial institutions — Export-Import Bank of Korea, Industrial Bank of Korea, Korea Finance Corporation, Korea Housing Finance Corporation, Korea Development Bank, and Korea Student Aid Foundation.
"These financial institutions are important policy arms of the government and, as such, benefit from certain explicit government support,” said Moody’s.
However, there was no impact on the ratings of most of the country’s non-financial government-related firms, largely due to weaker standalone credit profiles and the absence of explicit state guarantees. Only Korea Rail Network Authority had its rating upgraded to the new sovereign level.
Korea’s credit default swaps and benchmark government bond yields fell a couple of basis points in response to Moody’s announcement, according to Bloomberg.