RAM Ratings reaffirms South Korea’s gA1(pi) global-scale rating

Published on 20 April 2015

RAM Ratings has reaffirmed the respective gA1(pi)/stable and seaAAA(pi)/stable global- and ASEAN-scale sovereign ratings of South Korea. The ratings are premised on South Korea’s dynamic and resilient economy, conservative fiscal management, strong external position and favourable institutional framework. These positives are, however, moderated by the country’s high household debt level, sizeable contingent liabilities from borrowings of government-linked entities (GLEs) and the geopolitical risk posed by North Korea.

“South Korea’s sound and resilient economic performance compares favourably to that of most other advanced nations,” notes Esther Lai, RAM’s Head of Sovereign Ratings. This is evinced by the country’s healthy GDP growth averaging 3.7% in the past 5 years versus the 1.8% average growth rate registered by advanced economies during the same period. That said, the South Korean economy faces structural impediments such as low wage growth, high household debt and a rapidly ageing population which constrain the domestic growth momentum. The government’s recently proposed measures to support private consumption, such as increasing the minimum wage and supporting employment growth, are viewed positively in respect of addressing the economy’s structural challenges.

Meanwhile, South Korea’s external strength is underlined by consistent current-account surpluses, with healthy export growth averaging 8% in the past 5 years, a net external creditor position and sizeable foreign-reserve holdings. The government maintains a track record of fiscal prudence, as seen in its fiscal surplus that has averaged 1.1% of GDP in the past decade and a low debt level of 30.9% of GDP during the same period. While the government had a sizeable exposure to GLE-related contingent liabilities amounting to 58.8% of GDP as at end-2014, reform measures aimed at paring down GLE liabilities are gaining traction. Elsewhere, the country’s high household debt level of 85.2% of GDP as at the same date had grown at a more manageable pace with a gradually improving borrower profile.

South Korea’s ratings will be moved upwards if a stronger and sustained recovery in the economic growth momentum, particularly in private consumption and investment, is observed. Continuous progress in managing the high household debt level and GLE deleveraging are also deemed credit positive. However, persistent disinflationary pressure which derails the momentum of economic recovery, household debt growth beyond manageable levels and/or geopolitical events that cause significant disruptions to the economy will be viewed as credit negative.

Media contact
Cheong Kah Weng
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kahweng@ram.com.my