Published on 18 June 2015
RAM Ratings opines that the prompt response
by South Korean policymakers to combat the current weakening of its
economy amid the Middle East Respiratory Syndrome (MERS) outbreak is a
sound move. In this regard, the Bank of Korea’s recent 25-bps reduction
of its policy rate to 1.5% and the government’s announcement of
immediate financial assistance to services-related industries that are
most likely to be affected by the MERS scourge provide some mitigation.
“As a whole, South Korea’s adequate policy capacity will help it weather
these short-term adversities,” notes Esther Lai, RAM’s Head of
Sovereign Ratings.
Even though South Korea’s domestic consumption and
investment activity picked up in 1Q 2015, supported by still-healthy
employment creation and real wage growth, external trade was hampered by
a deceleration in the country’s major export markets (China and
Europe), leading to a slower y-o-y GDP growth of 2.4% for the quarter
(4Q 2014: 2.7%). While RAM believes that South Korea’s official growth
forecast of 3.1% for 2015 will encounter downside risks from domestic
and external challenges, the government’s healthy fiscal position still
allows space for further expansionary policies to buffer a potential
slowdown in its near-term growth momentum. We therefore expect the
country to maintain a pace that is better than that of most of the other
advanced nations.
South Korea carries respective gA1(pi)/stable and
seaAAA(pi)/stable ratings on RAM’s global and ASEAN scales, premised on
the country’s dynamic and resilient economy, conservative fiscal
management, strong external position and favourable institutional
framework. These positives are, however, moderated by its high levels of
household debt, sizeable contingent liabilities from the borrowings of
government-linked entities and the geopolitical risk posed by North
Korea.
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